Implications of cash hoarding for shareholders

Abstract

Agency theory suggests that firms with very high cash balances (“cash hoarders”) are likely to misinvest their funds. However, if investors do not fully recognize the implications of a high cash balance, then future returns may be predictable for cash-hoarding firms. We find that cash hoarders significantly underperform over the two years following their identification as hoarding. In subsequent analysis, we find that returns are significantly negative in the year that a prior cash-hoarding firm reports a significant decrease in cash. Our results suggest that investors do not fully appreciate the implications of a high cash balance for future returns, but do recognize problems when that cash is subsequently spent.

Citation

Oler, D. and Picconi, M. (2009), "Implications of cash hoarding for shareholders", Hirschey, M., John, K. and Makhija, A.K. (Ed.) Corporate Governance and Firm Performance (Advances in Financial Economics, Vol. 13), Emerald Group Publishing Limited, Leeds, pp. 35-52. https://doi.org/10.1108/S1569-3732(2009)0000013004