There is a positive correlation between cash holdings and firm value. Higher cash holdings allow firm to undertake any possible positive NPV project (David, 2010). In the point of view of investors, cash holdings do bring positive value to firm. However, it is only up to a certain optimum level of cash holdings. It is seen as a potential shield on future investments of the firm against future cash issues. Too much cash may results in market discounts, possibly because of increased opportunity cost of money, inefficient payout policy, and agency costs (Loncan & Caldeira, 2013).
A study conducted on a number of US industrial firms from year 2001 to 2007 conforms that having an optimal level of cash holdings maximizes firm value, given the fact that it reduces the uncertainty of cash flow (Martinez-Sola, 2013).
In contrast, Kin-Wai (2009) argues that firm value is inversely related with its cash levels. This is more pronounced in firms of lower proportion of outside directors, larger boards, and higher expected managerial entrenchment. Ameer (2012) conforms that an increase in cash levels in a firm of poor corporate governance practices, would results negatively on the firm’s market valuation.
Cash holdings are not necessarily have impact on firm value. However, shareholders’ valuation on firms’ cash holdings is said to be based on (i) financial constraints; (ii) growth of the firm; (iii) uncertainty of cash flow condition; and (iv) competition in…