What is a Dollar Worth? The Market Value of Cash Holdings

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Abstract
A curious fact of financial markets is that some firms have cash holdings in excess of their market value. To highlight this point, the Wall Street Journal reported that several firms had negative enterprise values (the market value of a company plus its debt and preferred stock minus its cash). This phenomena raises the obvious question: What value do investors place on the cash holdings of a firm? This study addresses this phenomena by investigating the market value of cash held by firms. In general, we estimate the value of a marginal dollar of cash to be about $1.20. However, we find large cross-sectional differences consistent with existing theory on what investors think are most important in firm valuation. We document that the quality and volatility of the firm's investment opportunity set as well as the magnitude of stockholder-bondholder conflicts impact the value shareholders place on cash holdings. Firms with good growth options have their cash valued at a premium to those with poor growth prospects. Additionally, cash is valued less in firms with stable investment programs and those nearer to financial distress. We do not find that access to the capital markets affects shareholder's valuation of cash holdings. Overall, it appears that the investment opportunity set, rather than the financing opportunity set of the firm affects the value that shareholders place on a firm's cash holdings.

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