Does financial reporting regulation influence the value of cash holdings?

SUMMARY This study investigates the monitoring role of high-quality auditors defined as office-level industry specialists in the stock market valuation of cash assets. We find that the market value of cash holdings is significantly higher for the client of an industry specialist auditor. The marginal value of cash is 34 cents higher for the client of a joint-industry specialist at both the national and city levels than for the client of a nonspecialist. We also find that cash holdings are more closely associated with capital investment and the market value of capital investment is significantly higher when the auditor is a joint-industry specialist. Moreover, we find that the value of cash increases significantly when the client changes its auditor to a joint-industry specialist. Our findings hold even after controlling for the client's governance efficacy and financial reporting quality. Our results provide new insight into the mechanism through which high-quality audits affect firm value: External audits facilitate shareholders' monitoring over managerial cash expenditures, thereby leading market participants to attach a higher value to cash holdings.

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The Effect of Financial Reporting Quality on the Value of Cash Holdings : Focused on Audit Fees and Audit Hours

Korean Accounting Review ◽

10.24056/kar.2018.12.001 ◽

2018 ◽

Vol 43 (6) ◽

pp. 187-231

Author(s):

Jongil Park ◽

Sangyi Shin

Keyword(s):

Financial Reporting ◽

Cash Holdings ◽

Reporting Quality ◽

Audit Fees ◽

Financial Reporting Quality ◽

Value Of Cash

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Internal Control over Financial Reporting and the Safeguarding of Corporate Resources: Evidence from the Value of Cash Holdings

Contemporary Accounting Research ◽

10.1111/1911-3846.12164 ◽

2015 ◽

Vol 33 (2) ◽

pp. 783-814 ◽

Cited By ~ 20

Author(s):

Xinghua Gao ◽

Yonghong Jia

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Cash Holdings ◽

Value Of Cash ◽

Corporate Resources

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Accounting Restatements and Corporate Cash Policy

Journal of Accounting Auditing & Finance ◽

10.1177/0148558x17732654 ◽

2017 ◽

Vol 35 (2) ◽

pp. 290-317 ◽

Cited By ~ 2

Author(s):

Huili Chen ◽

Zhihong Chen ◽

Dan S. Dhaliwal ◽

Yuan Huang

Keyword(s):

Financial Reporting ◽

Cash Holdings ◽

Market Value ◽

Precautionary Savings ◽

Difference In Differences ◽

Accounting Restatements ◽

Pronounced Increase ◽

Corporate Decisions ◽

Value Of Cash ◽

Excess Cash

Using a difference-in-differences approach, we find that the cash holdings of firms increase significantly after announcements of irregularity-related restatements. The increase is larger for firms with a higher demand for precautionary savings and is smaller for firms with less pronounced increase in shareholder control after the restatements. Investments and repurchases of irregularity firms become more sensitive to excess cash after the restatements. In addition, we find that the market value of cash holdings increases after restatements. Overall, the evidence suggests that strengthened shareholder control reduces cash holdings, but this effect is weaker than the increase in cash holdings due to exacerbated precautionary savings concerns. Our study contributes to the literature on the effect of financial reporting credibility on real corporate decisions.

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