Role of Accounting Conservatism and Earnings Quality on Marginal Value of Cash Holdings in Companies Listed in Tehran Stock Exchange

Abstract

One of the most important financial decisions of managers is determining the level of cash holdings. Recent studies find that deviation from the optimal level of cash holdings may reduce the market value of company and its performance. This paper investigates whether accounting conservatism and earnings quality could mitigate the value destruction associated with increase in cash holdings. Furthermore, this study investigates the role of accounting conservatism on marginal value of cash holdings, considering financial constraints. To test the search hypothesis, we used multiple regression analysis and the financial data of 111 sample companies in the period 2001 to 2012.The results indicated that accounting conservatism could mitigate the value destruction associated with an increase in cash holdings. Also, increasing the level of financial constraint reduces the role of accounting conservatism in improvement of market value of cash holdings. Furthermore, the relationship between earnings quality and marginal value of cash holdings is negative.

Keywords

• accounting conservatism
• earnings quality
• cash holdings
• value of company