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How does real earnings management affect the value of cash holdings? Comparisons between information and agency perspectives

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  • Chang, Che-Chia
  • Kao, Li-Han
  • Chen, Hsin-Yu

Abstract

In this paper, we investigate whether real earnings management is associated with the precautionary benefits or agency costs of cash holdings. We find that real earnings management impairs the value of cash holdings. However, the value of cash holdings is not associated with accrual-based earnings management, which has no effect on cash flows. Our results show that real earnings management impairs the value of cash holdings mainly in firms having potential agency problems or firms facing financial constraints. Moreover, our results indicate that different means of real earnings management influence cash flows from operating, investing, or financing activities, and impair the value of cash flows from the respective business activities. Overall, our results support the conclusion that real earnings management is associated with the agency costs of cash holdings.

Suggested Citation

  • Chang, Che-Chia & Kao, Li-Han & Chen, Hsin-Yu, 2018. "How does real earnings management affect the value of cash holdings? Comparisons between information and agency perspectives," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 47-64.
    • Handle: RePEc:eee:pacfin:v:51:y:2018:i:c:p:47-64
    DOI: 10.1016/j.pacfin.2018.06.001
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    2. Yang, Hanping & Xue, Kunkun, 2023. "Board diversity and the marginal value of corporate cash holdings," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    Corporate cash holdings; Real earnings management; Agency problems; Information asymmetry;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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