Cash holdings and earnings quality: evidence from the Main and Alternative UK markets

• Type: Article in International Scientific Journal
• Date: 2018-01-31

Authors

Jorge Farinha (Author) FEP; Cesário Mateus (Author) Other; Nuno Soares (Author) FEUP

Journal

Title: International Review of Financial Analysis

Vol. 56

Pages: 238-252

ISSN: 1057-5219

Publisher: Elsevier

Indexing

ISI Web of Knowledge - 39 Citations

ISI Web of Science

Scopus - 48 Citations

EBSCO

Scientific classification

CORDIS: Social sciences > Economics > Management studies > Financial management

Other information

Authenticus ID: P-00N-HE3

DOI: 10.1016/j.irfa.2018.01.012

Abstract (EN): In this paper we investigate the importance of earnings quality as a determinant of cash holdings by companies, exploring among other factors the nature of earnings (positive or negative) and the level of financial disclosure, proxied by the market where firms are listed (Main or AIM-Alternative Investment Markets in the United Kingdom). Based on a sample covering the period of 1998-2015, we provide evidence that as earnings quality decreases, firms tend to hold more cash except when firms are facing losses in both Main and AIM markets. In addition, we document that information conveyed by earnings quality is a more important determinant of cash reserve levels for Main Market than for AIM firms (where the level of financial disclosure and oversight is lower). Overall, our evidence suggests that cash balances are positively influenced by the presence of greater information asymmetries arising from poor earnings quality but also from the existence of lower levels of regulatory oversight and the occurrence of losses, both of which reduce the importance of earnings quality as a determinant of cash levels. Our results also imply that companies with higher levels of earnings opaqueness seem to benefit from having higher cash holdings so as to avoid dependence from costly external funding.

Language: English

Type (Professor's evaluation): Scientific

No. of pages: 15