Value of excess cash holdings of financially unconstrained companies

This study provides an investigation into the link between financial constraints and cash holdings from the perspective of a developing country. It is based on the view that managers acting as agents are managing firms on behalf of shareholders, which is leading to agency conflicts and hence giving rise to the Free Cash Flow hypothesis. In addition, the management of cash looks at liquidity as well as the resources of a firm in order to invest in future growth. The current study thus provides a comparison of the value of excess cash holdings by examining the impact of financial constraints. The analysis is based on a single dimension, as well as multiple criteria dimensions, where the findings indicate that excess cash holding is less valuable for unconstrained companies. This suggests that agency problems are the main motives behind excess cash holdings for these companies. Furthermore, the findings indicate that the values are large for constrained firms providing insights into the need for managers of these companies to evaluate cash management strategies in order to enhance corporate value. Furthermore, it provides useful insight for regulators as well as shareholders in terms of the importance of governing and regulating capital markets in the context of a developing country despite having significantly lower balances relative to developed markets.