Impact of cash holdings and ownership concentration on firm valuation

Abstract

PurposeThe purpose of this paper is to investigate the impact of firms' cash holdings and ownership concentration on the firms' valuation using an unbalanced panel dataset of non‐financial listed firms in Australia.Design/methodology/approachThe author used a generalized method of moments approach suitable for unbalanced panel dataset to examine the impact of firms' cash holdings and ownership concentration on firms' q‐ratios after controlling for the impact of financing, dividend and investment decisions, respectively.FindingsThe paper finds a positive relationship between cash holdings and q‐ratio of Australian firms. The ownership structure moderates the effect of cash holdings on q‐ratio in asymmetric fashion, i.e. for widely held firms, there is a positive relationship between cash holdings and q‐ratio; while for closely held firms, there is significant negative relationship between cash holdings and q‐ratio. Furthermore, changes associated with corporate governance reforms, also effect q‐ratio besides ownership structure. The paper also examined the impact of cash holdings on the market value of the firms over time. As the author predicted, increase in the cash holdings has a negative effect on the firms' market valuation, and this effect slows down over time. Overall, the empirical analysis finds support for similar findings documented for the developed countries in the literature.Research limitations/implicationsThe sample consists of non‐financial listed firms over the period of 1995 to 2010.Practical implicationsThe results imply that widely‐owned firms have lower cash holdings because managers are able to access capital market easily compared to firms with concentrated ownership, which might have complex agency and information asymmetry problems. These findings are consistent with the agency costs. Managers in less widely‐held firms have more discretion over cash holding policies, and the value reduction imposed on these firms may reflect shareholders' recognition of the possibility of managerial expropriations.Originality/valueThis is believed to be the first paper to explore agency costs of cash holdings for Australian firms.

Study on theories and mechanisms of corporate governance

“…García-Meca and Sánchez-Ballesta (2011) have reported that ownership concentration appears to influence firm value favourably, but at high levels a detrimental effect causes market valuation to be negatively affected by high levels of large shareholder ownership. Ameer (2012) found a positive relationship between cash holdings and q-ratio of Australian firms. The ownership structure moderates the effect of cash holdings on q-ratio in asymmetric fashion, i.e., for widely held firms, there is a positive relationship between cash holdings and q-ratio; while for closely held firms, there is significant negative relationship between cash holdings and q-ratio.…”

Faktor-Faktor Prediktor Investment Opportunity Set Dan Firm Value Pada Perusahaan Propertydan Real Estate Yang Terdaftar Di Bei

“…Untuk mencapai firm value itu sendiri, diperlukan beragam fungsi dan kebijakan dalam menunjang kegiatan operasional dan investasi yang ada. Ameer (2012) menyatakan bahwa alokasi sebuah perusahaan dalam mengelola asetnya merupakan faktor fundamental dalam meningkatkan pertumbuhan perusahaan di masa depan yang akan secara searah mempengaruhi mengoptimalkan kesejahteraan pemegang saham. Dari sudut pandang investor sendiri, tinggi-rendahnya firm value akan tercermin melalui harga pasar saham sebuah perusahaan tersebut (Walker, 2000).…”

Cash holdings, costly financing and theqtheory of returns

“…() show that even though higher cash holdings are associated with lower cash values on average, Australian firms facing higher uncertainty of greater financial constraint benefit from holding cash that otherwise appears excessive. Ameer () show that Australian firms with higher ownership concentration, and therefore potential control problems, have a negative relation between q and cash holdings while lower ownership concentration firms have a positive relation. I do not directly address agency problems and the value of cash, but note that the model estimates suggest different measures of financial constraint more closely relate to supply of financing effects while others relate to demand for financing effects.…”