Investigating Excess Cash, Firm Value and Stock Liquidity Risk in Firms with Growth Opportunities or Financial Constraints

Document Type : Research Paper


1 Assistant Prof., Department of Financial Management, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran.

2 MSc. Department of Financial Management, Faculty of Management and Accounting, Shahid Beheshti University, Tehran, Iran.


Objective: Stock liquidity is one of the most critical factors for investors in the capital markets and one of the main functions of the stock exchange. The tendency to investigate this issue stems from the fact that investors decide to trade in the capital market by comparing the risk and return of investment opportunities, and liquidity risk is one of the main risks. Managers are considered this issue, and various aspects of it have been studied so far. The purpose of this study is to determine the effect of excess cash on firm value and investigating the benefits of cash holding in firms with higher growth opportunities or financial constraints.
Methods: Liu's 2006 measure for liquidity risk is used, which instead of focusing on a specific aspect of liquidity risk, such as trading volume and the difference between the buy and sale price, covers all aspects of it. The present study is in the category of post-event research. The data used in the research is related to 189 firms of the Tehran Stock Exchange from 2008 to 2018. In this study, Jark-Bra, Arch-Engel, BDS, Box-Pierce, IPS unit root, cohesion test, F-Limer, Hausman tests were used to evaluate descriptive statistics and results.
Results: Excess cash has recently been considered by researchers as one of the measures for estimating the liquidity risk of firms. The research variables were examined for reliability. For this purpose, IPS test were used. Based on the results of this test, all research variables except for the cost of Research and Development (R&D) which is scaled by sales and institutional shareholders are at a stable level, while the latter variables are stable with a one-time differentiation. Accordingly, due to the lack of significance of a number of variables in the level, the existence of a long-run relationship was tested by the co-integration test method. The results of the test show that despite the unreliability of some research variables at the level, there is a long-term relationship between research variables. The results indicate that excess cash is a valuable criterion for firms’ liquidity risk and its effect becomes more severe under the influence of growth opportunities or financial constraints.
Conclusion: The results indicate that the excess cash had a significant negative effect on the value of the firms. Additionally, in the study of firms with growth opportunities or financial constraints, it is found that for firms that have growth opportunities or financial constraints, the relationship between excess cash and liquidity of firms’ shares was more intense.


Acharya, V. V., Almeida, H., & Campello, M. (2007). Is cash negative debt? A hedging perspective on corporate financial policies. Journal of financial intermediation, 16(4), 515-554.
Allayannis, G. and Weston, J. (2001). The use of foreign currency derivatives and firm market value. Review of Financial Studies 14(1), 243–276.
Almeida, H., Campello, M., & Weisbach, M. S. (2004). The cash flow sensitivity of cash. The journal of finance, 59(4), 1777-1804.
Amihud, Y., & Noh, J. (2021). Illiquidity and Stock Returns II: Cross-section and Time-series Effects. The Review of Financial Studies, 34(4), 2101-2123.
Ball, R. (2006). International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), 5-27.
Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on properties of accounting earnings. Journal of accounting and economics, 29(1), 1-51.
Ball, R., Robin, A., & Wu, J. S. (2003). Incentives versus standards: properties of accounting income in four East Asian countries. Journal of accounting and economics, 36(1-3), 235-270.
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.
Brockman, P., Chung, D. Y., & Yan, X. (2009). Block ownership, trading activity, and market liquidity. Journal of Financial and Quantitative Analysis, 44(6), 1403-1426.
Brown, J. R., & Petersen, B. C. (2011). Cash holdings and R&D smoothing. Journal of Corporate Finance, 17(3), 694-709.
Carter, D. A., Rogers, D. A., & Simkins, B. J. (2006). Hedging and value in the US airline industry. Journal of Applied Corporate Finance, 18(4), 21-33.
Chulia, H., Koser, C., & Uribe, J. M. (2021). Analyzing the Nonlinear Pricing of Liquidity Risk according to the Market State. Finance Research Letters, 38, 101515.
Dang, T. L., & Nguyen, T. M. H. (2020). Liquidity risk and stock performance during the financial crisis. Research in International Business and Finance, 52, 101165.
Datar, V. T., Naik, N. Y., & Radcliffe, R. (1998). Liquidity and stock returns: An alternative test. Journal of financial markets, 1(2), 203-219.
Denis, D. J., & Sibilkov, V. (2010). Financial constraints, investment, and the value of cash holdings. The Review of Financial Studies, 23(1), 247-269.
Faulkender, M., & Wang, R. (2006). Corporate financial policy and the value of cash. The journal of finance, 61(4), 1957-1990.
Ghorbani, S., & Adili, M. (2012). Firm value, cash holdings and information asymmetry. Journal of Accounting Knowledge, 3(8), 131-149. (in Persian)
Guo, H., Legesse, T. S., Tang, J., & Wu, Z. (2020). Financial leverage and firm efficiency: the mediating role of cash holding. Applied Economics, 53(18), 1-17.
Habibisamar, J., Tehrani, R., & Ansari, K. (2016). Investigating the relationship between liquidity risk and market risk with growth and value stock returns by AHP modeling in Tehran Stock Exchange. Journal of Financial Engineering and Securities Management, 6(23), 39-58. (in Persian)
Harford, J., Mansi, S. A., & Maxwell, W. F. (2008). Corporate governance and firm cash holdings in the US. Journal of financial economics, 87(3), 535-555.
Huang, W., & Mazouz, K. (2018). Excess cash, trading continuity, and liquidity risk. Journal of Corporate Finance, 48, 275-291.
Isshaq, Z., & Faff, R. (2016). Stock liquidity risk and the cross‐sectional earnings-returns relationship. Journal of Business Finance & Accounting, 43(9-10), 1121-1141.
Izadinia, N., & Tabtabaei, S.Z. (2015). The Impact of Excess Cash on Conservatism Influence on Dividend Payout. Journal of Financial Accounting Research, 7(3), 36-17. (in Persian)
Jafari, A., & Jafari, M. (2018). Institutional Ownership Moderating Role and Financing Constraints on Relation between Excess of Cash Holding and Change in Firm Value. Journal of Iranian Accounting Review, 5(18), 1-26. (in Persian)
Jensen, M.C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. American Economic Review, 76(2), 323-329.
Johnson, S., Boone, P., Breach, A., & Friedman, E. (2000). Corporate governance in the Asian financial crisis. Journal of financial Economics, 58(1-2), 141-186.
Joudi, S., Mansourfar, G., & Didar, H. (2019). Internal and External Corporate Governance Quality, Information Asymmetry and Cash Holdings: Increase or Decrease in the Firm Value. Accounting and Auditing Review, 26(1), 39-64. (in Persian)
Kamran, M., Assadi, G., Asna Ashari, H. (2020). Investigating of the Nonlinear Relationship between Voluntary Disclosure and Firm Value by the Use of PSTR Model. Accounting and Auditing Review, 27(2), 231-257. (in Persian)
Kashanipour, M., Taghinezhad, B. (2009). Investigating the effect of financial constraints on cash flow sensitivity - cash flow. Accounting and Auditing Research, 1(2), 72-93.
(in Persian)
Lehn, K. & Poulsen, A. (1989). Free cash flow and stockholder gains in going private transactions. Journal of Finance, 44(3), 771–788.
Lin, J. C., Singh, A. K., & Yu, W. (2009). Stock splits, trading continuity, and the cost of equity capital. Journal of Financial Economics, 93(3), 474-489.
Liu, W. (2006). A liquidity-augmented capital asset pricing model. Journal of financial Economics, 82(3), 631-671.
Mehrani, S., & Rasaeian, A. (2009). Investigating the Relationship between Stock Liquidity Criteria and Annual Stock Return on Tehran Stock Exchange. Accounting Advances, 1 (1), 217-230. (in Persian)
Moradi, M., Osoolian, M., & Norouzi, M. (2014). Audit opinion and earnings management: uncertainty in going-concern. Accounting and Auditing Review, 21(3), 313-328.
(in Persian)
Moradzadeh Fard, M., & Sayyadi, M. (2012). Assessment of Going-Concern Forecast Power by Using Numbers of Cash Flow Statement. Empirical Research in Accounting, 2(2), 89-103. (in Persian)
Ng, J. (2011). The effect of information quality on liquidity risk. Journal of Accounting and Economics, 52(2), 126-143.
Nohel, T. & Tarhan, V. (1998). Share repurchases and firm performance: New evidence on the agency costs of free cash flow. Journal of Financial Economics, 49(2), 187–222.
Noravesh, I., Karami, Gh., Vafi Sani, J. (2009). Investigating the Relationship between Corporate Governance Mechanisms and Representation Costs in Companies Listed in Tehran Stock Exchange. Accounting and Auditing Research, 1(1), 4-27. (in Persian)
Opler, T., Pinkowitz, L., Stulz, R., Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52(1), 3-46.
Osoolian, M., Bagheri, E. (2016). A study on the effect of cash flows on the gap between the actual leverage and optimal financial leverage ratio. Accounting and Auditing Review, 23(3), 311-332. (in Persian)
Osoolian, M., Sadeghi Sharif, S., Khalili, M. (2018). Accruals, Cash Flow, and Operating Profitability in the Cross Section of Stock Returns; Evidence from Tehran Stock Exchange (TSE). Accounting and Auditing Review, 24(4), 463-482. (in Persian)
Palazzo, B. (2012). Cash holdings, risk, and expected returns. Journal of Financial Economics, 104(1), 162-185.
Pedroni, P. (2004). Panel Co Integration, Asymptotic and Finite Sample Properties of
Pooled Time Series Tests with an Application to the PPP Hypothesis. Econometric
20(3), 597-625.
Rafi'i Khaje Pasha, M. (2018). The mediating role of surplus cash in the relationship between profit quality and financial distress. Master Thesis, Al-Zahra University. (in Persian)
Roll, R., Schwartz, E., & Subrahmanyam, A. (2009). Options trading activity and firm valuation. Journal of Financial Economics, 94(3), 345-360.
Salehi, M., Zamani Moghaddam, S. (2016). The relationship between audit quality and liquidity ratios, return on working capital and stock index. Accounting and Auditing Research, 7(28), 57-74. (in Persian)
Sarlak, N., Faraji, O., Ezadpour, M., & Joudaki Chegeni, Z. (2018). CEO Over-confidence and corporate cash holdings: Emphasizing the moderating role of audit quality. Accounting and Auditing Review, 25(2), 199-214. (in Persian)
Servaes, H. (1991). Tobin’s q and the gains from takeovers. Journal of Finance 46(1), 409–419.
Simutin, M. (2010). Excess cash and stock returns. Financial Management, 39(3), 1197-1222.
Taheri, Z. (2018). Investigating the relationship between stock liquidity criteria and equity cost. Master Thesis, Faculty of Management and Accounting, Alborz University. (in Persian)
Talebi, B. M., Jafari, M., Memarian, E. (2019). Investigating the Relationship between Capital Structure and Cash Surplus and Liquidity Risk (Case Study: Companies Listed on the Tehran Stock Exchange). Fourth National Conference on Management, Accounting and Economics with Emphasis on Regional and Global Marketing. (in Persian)
Waitherero, K. F., Muchina, S., & Macharia, S. (2021). The role of liquidity risk in augmenting firm value: lessons from savings and credit cooperatives in Kenya. International Journal of Financial, Accounting, and Management, 2(4), 295-304.
Yahya Zadeh Far, M., & Khorramdin, J. (2009). The Role of Liquidity Factors and Illiquidity Risk on Excess Stock Return in Tehran Stock Exchange. Accounting and Auditing Review, 15(53), 101-118. (in Persian)
Zandi, F., & Daman Keshide, M. (2019). Cash surplus, financial constraints and growth opportunities on continuing trading and liquidity risk. Fourth Conference on Management, Industrial Engineering, Economics and Accounting. (in Persian)