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Analysing the effect of excess cash accumulation on financial decisions

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  • María Belén Lozano

Abstract

In this current moment of crisis it is very important for firms to hold a suitable amount of cash. But it is also very important to analyse how this amount of cash affects firm value. Here an in-depth study is made of the determination of firm value centring our attention on the problem of excess cash accumulation. This article adds important value to the existing literature since, employing the panel data methodology in the sample of Spanish nonfinancial firms, it identifies whether excess cash holding affects firm value in general, and investment, financing and dividend decisions in particular. The results show how asymmetric information among the economic agents of the firm affects the cash reserves. In particular, shareholders could penalize the investment made by these firms and consider the positive effect that the debt in particular and the dividend policies exert on the firm. Moreover, the results reveal the importance of financial flexibility as opposed to the arguments provided by agency theory.

Suggested Citation

  • María Belén Lozano, 2012. "Analysing the effect of excess cash accumulation on financial decisions," Applied Economics, Taylor & Francis Journals, vol. 44(21), pages 2687-2698, July.
    • Handle: RePEc:taf:applec:v:44:y:2012:i:21:p:2687-2698
    DOI: 10.1080/00036846.2011.566195
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    Cited by:

    1. Arshed Fouad Altameemi, 2021. "The Relationship Between Financial Flexibility and Market Value Added: The Mediation Effect Role of the Corporate Size (A Practical Study on a Sample of Jordanian Industry Sector Firms)," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 13(1), pages 1-52, January.

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