Do Real Options of Cash Holdings Matter? Evidence from Tehran Stock Exchange
Subject Areas : • Emerging technology in the field of Accounting and its futurehassan nazari 1 , Mohammad taghi kabiri 2
1 - Assistant Professor, Department of Management and Accounting, Faculty of Humanities, Zanjan University, Zanjan, Iran
2 - Assistant Professor of Accounting Department, Economics Faculty, Lorestan University, Khorramabad, Iran
Keywords: Stock Return, Excess Return, Cash Holding, Real option component of cash holding, Real Options Mode,
Abstract :
Subject and purpose: This paper investigates the relationship between the real option component of cash holding and stock excess return on the Tehran Stock Exchange. The real option component of cash holding indicates the amount of retained cash not affected by the market and other variables and optionally managed by the management. Methodology: Two hypotheses were developed and tested, one at the stock level and another at the portfolio level. A sample of 121 companies on the Tehran Stock Exchange for 10 years from 2012 to 2021 was selected and a multivariate regression model was used to analyze the gathered data. Findings: Findings showed a positive relationship between the real option component of cash holding and stocks’ excess return however, this relationship is stronger in portfolios with a lower real option component of cash holding. Conclusion: Managers can gain excess return by holding more cash than their operational and investment needs, but this has a reverse effect as the component reaches higher levels.
1. Agayi, MohammadAli; Nezafat, AhmadReza; Nazemi Ardakani, Mahdi; & Javan, Ali Akbar (2009) “Factors Affecting the maintenance of Cash Balances in Tehran Stock Exchange Listed Companies” Financial Accounting Researches, Issue 1 and 2, 53-70.
2. Al-Najjar, B. (2013). The financial determinants of corporate cash holdings: Evidence from some emerging markets. International Business Review, 22(1), 77-88.
3. Al-Najjar, B.; Belghitar, Y. (2011) Corporate cash holdings and dividend payments: Evidence from simultaneous analysis, Managerial and Decision Economics, 32 (2011), pp. 231-241
4. Al-Najjar, B.; Clarck, E. (2017) Corporate governance and cash holdings in MENA: Evidence from internal and external governance practices, Research in International Business and Finance, 39 (2017), pp. 1-12
5. Azimi, Majid; Sabbagh, Manije (2014) “Value Connection of Cash Holding in Tehran Stock Exchange Companies” Financial Accounting Quarterly Journal, Issue 21, 129-152.
6. Bates, T. W., Kahle, K. M., & Stulz, R. M. (2009). Why do US
firms hold so much more cash than they used to? The Journal
of Finance, 64(5), 1985-2021.
7. Baumol, W. (1952) The transactions demand for cash: An inventory theoretic approach, Quarterly Journal of Economics, 66 (1952), pp. 545-556.
8. Charles Cao, Timothy Simin and Jing Zhao (2008) Can Growth Options Explain the Trend in Idiosyncratic Risk?, The Review of Financial Studies , Vol. 21, No. 6, pp. 2599-2633.
9. Chen, Jiun-Lin., Jia, Zi., Sun, Ping-Wen. )2016(. Real option component of cash holding, business cycle, and stock returns. International Review of Financial Analysis. Volume 45, Pages 97–106.
10. Chung, K. H., Kim, J. C., Kim, Y. S., & Zhang, H. (2015).
Information asymmetry and corporate cash holdings. Journal
of Business Finance & Accounting, 42(9-10), 1341-1377
11. Da, Z., Guo, R.J., Jagannathan. R., )2012(. CAPM for estimating the cost of equity capital: interpreting the empirical evidence. Journal of Financial Economics 103 (1), 204–220
12. Dittmar, A.; & Mahrt-Smith, J. (2007). Corporate governance and the value of cash holdings. Journal of Financial Economics, 83(3), 599-634.
13. Dittmar, A.; Mahrt-Smith, J.; & Servaes, H. (2003). International Corporate Governance and Corporate Cash Holding, Journal of Financial and Quantitative Analysis, 38, 111–133.
14. Drobetz, W.; Grüninger, M.C. (2007) Corporate cash holdings; Evidence from Switzerland, Financial Markets Portfolio Management, 21 (2007), pp. 293-324.
15. Fama, E.F., French. K.R., )1993(. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33 (1), 3–56.
16. Ferreira, M. A., & Vilela, A. S. (2004). Why do firms hold
cash? Evidence from EMU countries. European Financial
Management, 10(2), 295-319.
17. Garavito, Judith Vergara; Chion, Sergio J. (2021) “Relationship between cash holdings and expected equity returns: evidence from Pacific alliance countries” Journal of Economics, Finance and Administrative Science, vol.26 no.51.
18. Jensen, M. C. (1986). Agency costs of free cash flow, corporate
finance, and takeovers. The American Economic Review, 76(2),
323-329.
19. Kim, H. (2015). Contemporary Financial Profile and Its
Implications on the Level of Corporate Cash Holdings for
Korean Chaebol Firms. Journal of the Korea Academia-Industrial Cooperation Society, 16(6), 3870-3881.
20. Kim, C.; Mauer, D.C.; Sherman, A.E. (1998) The determinants of corporate liquidity: Theory and evidence, Journal of financial and Quantitative Analysis, 33 (1998), pp. 335-358
21. Kisser, M., (2013). The real option value of cash. Review of Finance 17 (5), 1649-1697.
22. Maheshwari, Y., & Rao, K. V. (2017). Determinants of corporate
cash holdings. Global Business Review, 18(2), 416-427
23. Miller, Merton H.; Orr, Daniel (1966) A Model of Demand for Money by Firms. Quarterly Journal of Economics, Vol. 80: 413-435.
24. Myers S (1984) The Capital Structure Puzzle, Journal of Finance, Vol. 39: 572-592.
25. Myers, Stewart C.; Majluf, Nicholas S. (1984) Corporate financing and investment decisions when firms have information that investors do not have, Journal of Financial Economics, Volume 13, Issue 2, 187-221.
26. Opler, Tim; Pinkowitz, Lee; Stulz, ReneH; Williamson, Rohan (1999). The Determinants and Implications of Corporate Cash Holding, Journal of Financial Economics 52, 3-46.
27. Ozkan, Aydin; Ozkan Neslihan, (2004). Corporate Cash Holding: An Empirical Investigation of UK Companies, Journal of Banking & Finance, 28, 2103–2134.
28. Pinkowitz, Le; Stulz, René; Williamson, Rohan (2006) “Does the Contribution of Corporate Cash Holdings and Dividends to Firm Value Depend on Governance? A Cross‐country Analysis”, Journal of Finance, vol. 61, issue 6, 2725-2751
29. Rahimian, Nezam-o-Aldin; Gorbani, Mahmud; Shabani, Keyvan (2013) “Relationship between Holding Surplus Cash and Stock Value in Tehran Stock Exchange” Financial Accounting Empirical Researches, Issue 40, 151-175.
30. Rashed, Ahmed; Ghoniem, Waleed (2022). “The impact of cash holding on stock returns in small and medium enterprises on the Egyptian Nile Stock Exchange” Investment Management and Financial Innovations, 19(3), 83-92.
31. Rashid, Muhammad Khalil, (2016) The Effect of Corporate Cash Holding on Stock Return. Available at SSRN: https://ssrn.com/abstract=276188592
32. Shehata, W., & Rashed, A. (2021). Accounting Conservatism, Information Asymmetry and Cash Holdings. Journal of Accounting, Business and Management (JABM), 28(1), 63-72.
33. Thakur, B. P. S., & Kannadhasan, M. (2019). Corruption and
cash holdings: Evidence from emerging market economies. Emerging Markets Review, 38, 1-17
34. Tze Chuan ‘Chewie’ Ang, F.Y. Eric C. Lam, Tai Ma, Shujing Wang, K.C. John Wei, (2019) “What is the real relationship between cash holdings and stock returns?” International Review of Economics & Finance, volume 64, 513-528,
35. VakiliFard, Hamid Reza; SorushYar, Afsane (2012) “Evaluation of Effect of diversion from Optimal level of Cash Holding on Performance and Future Return in Tehran Stock Exchange Companies” Financial Accounting Quarterly Journal, Issue 15, 117-133.
36. Ye, Y. (2018). A literature review on the cash holding issues.
Modern Economy, 9(6), 1054-1064.
37. Zhang, L. (2005) The value premium, Journal of Finance 60 (1), 67–103