Corporate cash savings and discretionary accruals

Abstract

Purpose

This paper assesses how discretionary accruals (DAs) affect corporate cash savings policies and the motivation behind this cash saving behavior and, also whether the linkage between DAs and cash saving affect the market-perceived cash value.

Design/methodology/approach

We construct the measure of DAs using the previous five-year average information to investigate the association of DAs with the change in cash. Moreover, the Faulkender and Wang (2006) methodology is utilized to examine the market-perceived cash value in DAs.

Findings

The key finding is that firms with high DAs save significantly more cash. A one standard deviation increase in DAs saves cash by 12.59%. Furthermore, the value of cash is low for these firms. The effect is stronger in firms with poor governance but not present in financially constrained firms.

Research limitations/implications

The empirical evidence highlights DAs have negative effect on market-perceived cash value, which underscores the insight that managers manage earnings opportunistically using DAs.

Originality/value

Taken together, we provide more evidence on the literature of accruals in earnings manipulation.

Citation

Jia, J., Shao, L., Sun, Z. and Zhao, F. (2020), "Corporate cash savings and discretionary accruals", China Finance Review International, Vol. 10 No. 4, pp. 429-445. https://doi.org/10.1108/CFRI-09-2019-0139