Firm value, corporate cash holdings and the role of managerial ability

Abstract

Purpose: This empirical study investigates whether corporate cash holdings impact on firm value and whether this relationship is moderated by managerial ability. With the proliferation of the shareholder value ideology since the 1970s and the growth of corporate cash holdings, investigating how cash holdings are valued by the capital markets is important. There is a dearth in studies that test this firm value–cash holdings nexus and how managerial ability moderates this association. Design/methodology/approach: We use a panel data research methodology to test the interrelationship of firm value, cash holdings, and management ability. We collect data of non-financial corporations (NFCs) listed on the Johannesburg Stock Exchange (JSE) from the year 2000 to 2020. Findings/results: The relationship between firm value and cash holdings follows an inverted U-shaped, suggesting that as cash holdings rise, firm value rises as well, up to the ideal cash level. After the optimal level, further increases in cash holdings result in a fall in firm value. Furthermore, this study finds that the effect of cash holdings on the value of firms under highly able managers is greater compared to cash holdings managed by less able managers. Practical implications: Our results emphasise to firms and shareholders the important effect of managerial expertise on firm value through the efficient use of cash holdings. Originality/value: This study provides empirical support to the trade-off theory’s claim of the existence of ideal cash holdings. We also extend the literature on the upper echelons theory by demonstrating the role of managerial ability on firm value.

Keywords

• upper echelons
• corporate cash holdings
• managerial ability
• firm value
• free cash flow theory
• trade-off theory
• non-financial corporates
• panel data