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When is cash king? International evidence on the value of cash across the business cycle

Author

Listed:
  • Jiaxing You

    (Xiamen University)

  • Ling Lin

    (University of Massachusetts Dartmouth)

  • Juanjuan Huang

    (Xiamen University)

  • Min Xiao

    (Xiamen University)

Abstract

Precautionary-motive theory implies that corporate cash holdings should be valued at a premium during recessions when uncertainty is high. However, from an agency-conflict perspective, business downturns aggravate agency problems, and investors tend to discount the value of corporate cash holdings during recessions. We test two hypotheses derived from these competing perspectives by examining the value of cash across different phases of the business cycle, using a sample of firms from 41 economies over the 1991–2016 period. Our results show that $1 of cash is valued about $0.67–$0.70 higher during a boom than during a recession, supporting the agency-conflict hypothesis. Our analyses show that this effect is not sensitive to national uncertainty-avoidance tendencies but varies with different levels of investor protection. These results confirm that investors discount the value of cash during recessions due to concerns about severe agency conflicts, and that investor protection mitigates this discount.

Suggested Citation

  • Jiaxing You & Ling Lin & Juanjuan Huang & Min Xiao, 2020. "When is cash king? International evidence on the value of cash across the business cycle," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 1101-1131, April.
    • Handle: RePEc:kap:rqfnac:v:54:y:2020:i:3:d:10.1007_s11156-019-00820-9
    DOI: 10.1007/s11156-019-00820-9
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    More about this item

    Keywords

    Business cycle; Value of cash; Precautionary motive; Agency conflicts;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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