Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)
Do all-equity firms destroy value by holding cash?
Abstract: Empirical evidence shows that as of 2006, nearly every
fifth large U.S. public corporation was all-equity financed and that the
corresponding average cash holding were nearly twice as high as of the
average U.S. firm. This paper therefore presents a simple real-options
model to characterize the value of cash for all-equity financed firms and
analyze its impact on a firm's investment decision. The model shows that
precautionary saving may lead to a delay in investment policy compared to
the benchmark of full external financing. This is because saving is an
option to invest at a lower price in the future and this option has an
additional time value, thereby delaying optimal investment. In the context
of growth options and external financing frictions cash has extra value but
this value is mostly negatively related to volatility. Testing empirically
whether all-equity firms destroy value by holding that much cash, I show
that on average the market values cash approximately at par. Moreover, cash
is rather valued at a premium if the presence of growth opportunities is
being controlled for.
Keywords: All-equity firms; cash holding; (follow links to similar papers)
JEL-Codes: G00; (follow links to similar papers)
58 pages, December 21, 2010
Before downloading any of the electronic versions below
you should read our statement on
for viewing Postscript files and the
Acrobat Reader for viewing and printing pdf files.
Full text versions of the paper:
Questions (including download problems) about the papers in this series should be directed to Stein Fossen ()
Report other problems with accessing this service to Sune Karlsson ()
or Helena Lundin ().
Design by Joachim Ekebom