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Measuring Excess Cash Balance and Studying its Relationship with Stock Return in Companies Accepted in Tehran Stock Exchange

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  • Zeinolabedin Sadeghi

    ()

  • Mojtaba Afshar Jahanshahi

    ()

  • Amin Kalantari Darranji

    ()

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    Abstract

    Goal of cash management is to limit cash levels in the company and maximize stock return. Cash should be kept at a level which makes balance between cash holding cost and insufficient cash cost. The present research studied the relationship between characteristics of companies and their cash holding. Excess cash amount was measured using regression model and its relationship with stock return of companies was analyzed. Statistical population included the companies accepted in Tehran Stock Exchange from 2006 to 2011 and the statistical sample was 151 companies which were selected from among them. The research results indicated that companies with higher ratio of market value to book value and larger size held less cash reserves. It seems that the mentioned specification played a role in determining cash holding policies of companies and potentially prevented from cash accumulation in them. Also, the companies which earned cash flow resulting from higher operations had higher cash balance and excess cash holding reduced stock return of the companies; as a result, investors show undesirable reaction to excess cash.

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    Bibliographic Info

    Article provided by Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences in its journal International Journal of Academic Research in Accounting, Finance and Management Sciences.

    Volume (Year): 4 (2014)
    Issue (Month): 1 (January)
    Pages: 340-351

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    Handle: RePEc:hur:ijaraf:v:4:y:2014:i:1:p:340-351

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    Web page: http://hrmars.com/index.php/pages/detail/Accounting-Finance-Journal

    Related research

    Keywords: Operating cash flow; operating capital; excess cash; stock return;

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    1. Michael Faulkender & Rong Wang, 2006. "Corporate Financial Policy and the Value of Cash," Journal of Finance, American Finance Association, vol. 61(4), pages 1957-1990, 08.
    2. Ramírez, Andrés & Tadesse, Solomon, 2009. "Corporate cash holdings, uncertainty avoidance, and the multinationality of firms," International Business Review, Elsevier, vol. 18(4), pages 387-403, August.
    3. Harford, Jarrad & Mansi, Sattar A. & Maxwell, William F., 2008. "Corporate governance and firm cash holdings in the US," Journal of Financial Economics, Elsevier, vol. 87(3), pages 535-555, March.
    4. Al-Najjar, Basil, 2013. "The financial determinants of corporate cash holdings: Evidence from some emerging markets," International Business Review, Elsevier, vol. 22(1), pages 77-88.
    5. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2003. "International Corporate Governance and Corporate Cash Holdings," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 38(01), pages 111-133, March.
    6. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    7. Guney, Yilmaz & Ozkan, Aydin & Ozkan, Neslihan, 2007. "International evidence on the non-linear impact of leverage on corporate cash holdings," Journal of Multinational Financial Management, Elsevier, vol. 17(1), pages 45-60, February.
    8. Edward Lee & Ronan Powell, 2011. "Excess cash holdings and shareholder value," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 51(2), pages 549-574, 06.
    9. Miguel A. Ferreira & Antonio S. Vilela, 2004. "Why Do Firms Hold Cash? Evidence from EMU Countries," European Financial Management, European Financial Management Association, vol. 10(2), pages 295-319.
    10. Ozkan, Aydin & Ozkan, Neslihan, 2004. "Corporate cash holdings: An empirical investigation of UK companies," Journal of Banking & Finance, Elsevier, vol. 28(9), pages 2103-2134, September.
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