1. Corporate Financial Policy and the Value of Cash
Faulkender and Wang,
2006, Journal of Finance,
61 (4):

2. Basic Questions What is the marginal value of corporate cash holdings?
Previous literature: estimate the marginal value of debt, see
Benefit/Costs of cash holdings
How is the value of cash differ across firms
How is the value of cash differ in various corporate polices

3. Basic Ideas (Three cash regimes)
The marginal value of cash should vary largely depending on how the cash is used:
R1: increasing distributions to equity via dividend payments or share repurchases, 1-d
R2: decreasing the amount of cash that needs to be raised in the capital markets, depending upon the firm’s capital market accessibility, 1/(1-f )
R3: servicing debt or other liabilities of the firm.

4. Basic Conclusions
The average marginal value of cash across all firms is $0.94.
As firms’ cash levels and leverage increase, their marginal value of cash decreases significantly.
The marginal value of cash is $0.13 higher if firm distribute cash stock repurchase rather than by dividend payments.
The average marginal value of cash for FC firms is significantly higher than NFC firms.
The difference in the marginal value of cash between FC firms and NFC firms is large among firms that have valuable investment opportunities but low levels of internal funds. (High Q, Low Inter-funds)

5. Empirical Predictions

6. Empirical Methodology
Excess return = rit - RitB
RitB is the 5x5 portfolio return (value-weighted), formed in each year.

7. Empirical Methodology

8. Data 1971-2001 Compustat Exclude financial firms and utility firms
Trim firm-specific factors and dependent variables at 1% tails
Drop firm-years with NA<0, MV<0, Div<0
Final sample: firm-years

9. Summary Statistics

10. Financial Constraints
Payout ratio: total dividends/earnings
Sort each year, cut at 30th(70th) percentile
Firm Size: sales
Long-term bond rating:
with/without bond rating
Commercial paper rating:
with/without commercial paper rating

16. Group I : Low coverage, Low M/B
Group II : Low coverage, High M/B
Group III : High coverage, Low M/B
Which one is the best/worse?

18. Extensions Cross listing Corporate Governance
Dittmar, A., J. Mahrt-Smith, 2007, Corporate Governance and the Value of Cash Holdings, Journal of Financial Economics, 83 (3):
Harford, J., S. Mansi, W. Maxwell, 2008, Corporate governance and firm cash holdings in the US, Journal of Financial Economics, 87 (3):
Cross listing
Frésard, L., C. Salva, 2010, The Value of Excess Cash and Corporate Governance: Evidence from U.S. Cross-listings, Journal of Financial Economics, 98 (2):
R&D
Brown, J. R., B. C. Petersen, 2011, Cash Holdings and R&D Smoothing, Journal of Corporate Finance, 17 (3):

19. Extensions (cont.) Financial Constraints Earnings quality
Denis, D., V. Sibilkov, 2010, Financial Constraints, Investment, and the Value of Cash Holdings, Review of Financial Studies, 23 (1):
Earnings quality
Sun, Q., K. Yung, H. Rahman, 2011, Earnings quality and corporate cash holdings, Accounting & Finance, forthcoming.
Political Connections
Hill, M. D., K. Fuller, G. W. Kelly, J. Washam, 2010, Corporate Cash Holdings and Political Connections, SSRN working paper,
Stock Repurchases
Haw, I.-M., S. S. Ho, B. Hu, X. Zhang, 2011, The Contribution of Stock Repurchases to the Value of Firm and Cash Holdings Around the World, Journal of Corporate Finance, 17 (1):