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Peer influence and the value of cash holdings

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  • Zhuang, Yuan
  • Nie, Jing
  • Wu, Weixing

Abstract

We show that a company’s cash holding position relative to the peer group is important for the value of cash holdings. A dollar of cash is valued significantly higher in firms that have cash holdings below the peer group median than in those that do not. The subsample tests show that such peer group benchmarking effect is more pronounced in smaller firms, financially constrained firms, those in industries with higher cash flow volatility, and those facing a highly competitive product market environment. These results are consistent with both information-based and competition-based mechanisms. Furthermore, we find that firms holding below peers’ cash reserves will mimic cash-increasing behavior exhibited by their peers. Crucially, the increased cash holdings will be spent on investment in the subsequent period, and we find that this investment does not hinder firm performance. The main findings in this paper are helpful in understanding the value implications of peer influence.

Suggested Citation

  • Zhuang, Yuan & Nie, Jing & Wu, Weixing, 2022. "Peer influence and the value of cash holdings," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 265-284.
    • Handle: RePEc:eee:empfin:v:69:y:2022:i:c:p:265-284
    DOI: 10.1016/j.jempfin.2022.10.003
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    Cited by:

    1. Xiaoxu Zhang & Xinyu Du, 2023. "Industry and Regional Peer Effects in Corporate Digital Transformation: The Moderating Effects of TMT Characteristics," Sustainability, MDPI, vol. 15(7), pages 1-22, March.

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    More about this item

    Keywords

    Cash holdings; Peer influence; Firm value; Product market competition; Managerial learning;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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