Two Essays on the Value of Cash
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In the first essay, "The Source of Cash and Its Marginal Value," we study the relation between the source of firms' cash holdings and the value of the cash to shareholders. The marginal value of a dollar of cash holdings depends on the source of the dollar: $1.00 of cash has a value of $1.27 when it is from operations, $0.80 when from financing, and $0.46 when from investing. Within the same source, the marginal value of an added dollar of cash holdings is significantly higher than the absolute value of a subtracted dollar. Shareholders of financially constrained or distressed firms value incremental cash holdings from almost any source more highly than do shareholders of unconstrained or stronger firms, but differences in value remain across the sources of cash within each subsample. Agency costs and information asymmetry are two frictions that appear to have the largest impact upon the value of cash. In the second essay, "Explanations for Diverging Values of Cash," we further explain the differing values of cash found in the first essay. Intertemporal relationships among the sources and uses of cash provide a rational basis for shareholders to assign different values of cash based on the source. Sources of cash provide information about likely uses of cash up to two to three years in the future, and many of the intertemporal relations are statistically and economically significant. Likewise, prior uses of cash relate significantly to later uses of cash. Past sources of cash inform investors about likely future sources, even up to five years into the future. The fact that different kinds of cash flows have predictive power for future cash flows helps explain the wide range of the values of cash associated with different sources.
Tippens, Timothy (2012). Two Essays on the Value of Cash. Doctoral dissertation, Texas A&M University. Available electronically from