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Impact of cash holdings and ownership concentration on firm valuation

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  • Rashid Ameer

Abstract

Purpose - The purpose of this paper is to investigate the impact of firms' cash holdings and ownership concentration on the firms' valuation using an unbalanced panel dataset of non‐financial listed firms in Australia. Design/methodology/approach - The author used a generalized method of moments approach suitable for unbalanced panel dataset to examine the impact of firms' cash holdings and ownership concentration on firms'q‐ratios after controlling for the impact of financing, dividend and investment decisions, respectively. Findings - The paper finds a positive relationship between cash holdings andq‐ratio of Australian firms. The ownership structure moderates the effect of cash holdings onq‐ratio in asymmetric fashion, i.e. for widely held firms, there is a positive relationship between cash holdings andq‐ratio; while for closely held firms, there is significant negative relationship between cash holdings andq‐ratio. Furthermore, changes associated with corporate governance reforms, also effectq‐ratio besides ownership structure. The paper also examined the impact of cash holdings on the market value of the firms over time. As the author predicted, increase in the cash holdings has a negative effect on the firms' market valuation, and this effect slows down over time. Overall, the empirical analysis finds support for similar findings documented for the developed countries in the literature. Research limitations/implications - The sample consists of non‐financial listed firms over the period of 1995 to 2010. Practical implications - The results imply that widely‐owned firms have lower cash holdings because managers are able to access capital market easily compared to firms with concentrated ownership, which might have complex agency and information asymmetry problems. These findings are consistent with the agency costs. Managers in less widely‐held firms have more discretion over cash holding policies, and the value reduction imposed on these firms may reflect shareholders' recognition of the possibility of managerial expropriations. Originality/value - This is believed to be the first paper to explore agency costs of cash holdings for Australian firms.

Suggested Citation

  • Rashid Ameer, 2012. "Impact of cash holdings and ownership concentration on firm valuation," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 11(4), pages 448-467, October.
    • Handle: RePEc:eme:rafpps:v:11:y:2012:i:4:p:448-467
    DOI: 10.1108/14757701211279196
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    2. Stavros E. Arvanitis & Theodoros V. Stamatopoulos & Maria Chatzimarkaki, 2017. "Cash and Ownership on Firms Market Value: Evidence from Greek Panel Data," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 70-91.
    3. Agus Satrya Wibowo & Imam Ghozali, 2018. "Does Value Creation Drives Growth Illusion? An Evidence from Indonesia Stock Exchange," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 491-506.
    4. Neal Galpin, 2020. "Cash holdings, costly financing and the q theory of returns," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 1149-1174, April.
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