Firm Characteristics and the Value of Cash Holdings

I examine the marginal value of cash for shareholders and firm characteristics that affect the value. I begin by showing the benefits and costs of cash holdings, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, I find that on average, a dollar increase in cash is valued at a premium to face value during the period of 2001 to 2012. In addition, the marginal value of cash declines with lower investment opportunities, higher leverage ratio, larger cash holdings, higher marginal tax rate, and better access to capital markets.