Corporate cash holding and firm value

1. Martínez Sola, Cristina
2. García Teruel, Pedro Juan
3. Martínez Solano, Pedro

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Abstract

The aim of this paper is to contrast the effect of cash holding on firm value for a sample of US industrial firms over the period 2001-2007. In order to do this, we first empirically test the existence of an optimal cash level that maximizes firm value. Secondly, we analyze whether deviations from the optimum cash level reduce firm value. Our results show a concave relation between cash holding and firm value, verifying that there is an optimal level of cash holding. Additionally, and consistent with the initial analysis, we also find that deviations above and below optimal cash holding decrease firm value.

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