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Does accounting quality predict corporate cash holdings?

Author

Listed:
  • Rajesh Pathak
  • Ranajee Ranajee
  • Ranjan Das Gupta

Abstract

This study empirically examines the role of better accounting quality as a substitute for corporate cash holdings. It uses data for Indian firms during 2006-2016 and employs a host of panel models to test the studied relationship amid a set of idiosyncratic controls and robustness tests. It reports that firms with high discretionary accruals hold high levels of cash, implying poor earnings quality leading to cash accumulation. Results are highly consistent for alternative measures of accounting quality and cash holdings, and are robust to controls of cash holdings antecedents and endogeneity issues. Furthermore, analysis of group-affiliated firms reveals that while group affiliates suffer from poor earnings quality compared to non-affiliates, this does not have bearing on their cash holdings. The results imply that managers of Indian firms should focus on maintaining better accounting quality to alleviate the need to accumulate cash as a means of avoiding fundraising constraints when needed.

Suggested Citation

  • Rajesh Pathak & Ranajee Ranajee & Ranjan Das Gupta, 2022. "Does accounting quality predict corporate cash holdings?," Afro-Asian Journal of Finance and Accounting, Inderscience Enterprises Ltd, vol. 12(4), pages 509-525.
    • Handle: RePEc:ids:afasfa:v:12:y:2022:i:4:p:509-525
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