eThesis - Kauppakorkeakoulun sähköiset gradut

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PURPOSE OF THE STUDY The purpose of the thesis is to study the effect of information problems on the valuation of cash holdings. The thesis extends previous research from two aspects. Firstly, the thesis takes into account the growth opportunities of a firm and examines the effect on the valuation of cash. Secondly, earlier research regarding the interrelation of asymmetric information and the valuation of cash has mainly been conducted with international samples, whereas this thesis takes a single-market perspective and focuses only on US firms.

DATA The data of this study consists of 815 firms listed in the New York Stock Exchange between 1999 and 2009, a total of 5,596 firm-year observations. The valuation regression analyzes the total market value of the firm as the dependent variable against control variables for earnings, net assets, R&D expenses, interest expenses and dividends. The firm-specific degree of asymmetric information is measured by an index that combines four proxies: (1) error in analysts’ forecasts, (2) forecast dispersion, (3) the number of analysts following the firm, and (4) firm size. All data comes from Thomson One Banker: regression variables are taken from the Worldscope- database and the analyst forecasts are from I/B/E/S- database.

RESULTS First, the study finds that the market value of a marginal dollar of cash is close to par i.e. one dollar. This confirms the results of earlier research. Secondly, the thesis finds that asymmetric information does not have a significant effect on the valuation of cash for an average firm. However, information problems are found to have a significant negative effect on the valuation of cash for firms with low growth opportunities. Results do not suggest a distinct effect for high growth opportunity firms.

Previous evidence for a negative valuation of cash under asymmetric information is in the sample found to occur only for firms with low growth opportunities. The results support the agency cost theory and the free cash flow problem.