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Corporate cash savings and discretionary accruals

Corporate cash savings and discretionary accruals This paper assesses how discretionary accruals (DAs) affect corporate cash savings policies and the motivation behind this cash saving behavior and, also whether the linkage between DAs and cash saving affect the market-perceived cash value.Design/methodology/approachWe construct the measure of DAs using the previous five-year average information to investigate the association of DAs with the change in cash. Moreover, the Faulkender and Wang (2006) methodology is utilized to examine the market-perceived cash value in DAs.FindingsThe key finding is that firms with high DAs save significantly more cash. A one standard deviation increase in DAs saves cash by 12.59%. Furthermore, the value of cash is low for these firms. The effect is stronger in firms with poor governance but not present in financially constrained firms.Research limitations/implicationsThe empirical evidence highlights DAs have negative effect on market-perceived cash value, which underscores the insight that managers manage earnings opportunistically using DAs.Originality/valueTaken together, we provide more evidence on the literature of accruals in earnings manipulation. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

Corporate cash savings and discretionary accruals

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2044-1398
DOI
10.1108/cfri-09-2019-0139
Publisher site
See Article on Publisher Site

Abstract

This paper assesses how discretionary accruals (DAs) affect corporate cash savings policies and the motivation behind this cash saving behavior and, also whether the linkage between DAs and cash saving affect the market-perceived cash value.Design/methodology/approachWe construct the measure of DAs using the previous five-year average information to investigate the association of DAs with the change in cash. Moreover, the Faulkender and Wang (2006) methodology is utilized to examine the market-perceived cash value in DAs.FindingsThe key finding is that firms with high DAs save significantly more cash. A one standard deviation increase in DAs saves cash by 12.59%. Furthermore, the value of cash is low for these firms. The effect is stronger in firms with poor governance but not present in financially constrained firms.Research limitations/implicationsThe empirical evidence highlights DAs have negative effect on market-perceived cash value, which underscores the insight that managers manage earnings opportunistically using DAs.Originality/valueTaken together, we provide more evidence on the literature of accruals in earnings manipulation.

Journal

China Finance Review InternationalEmerald Publishing

Published: Sep 22, 2020

Keywords: Corporate governance; Discretionary accruals; Earnings management; Cash savings; Financial constraints

References