Accruals Quality, Financial Constraints and Corporate Cash Holdings

This paper examines the impact of accruals quality on corporate cash holdings of a large sample of 6,501 observations of French firms listed in Euronext Paris over the period 2000-2015. The results show that cash holdings decrease with accruals quality, suggesting that firms tend to increase their cash reserves in the presence of information asymmetry driven, in particular, by low quality of accounting quality. Results also report that this negative effect is more pronounced in financially constrained firms than in financially unconstrained ones. This indicates that low reporting quality drives higher cash holdings when firms are, in addition, financially constrained, which emphasizes the importance of information asymmetry for corporate cash holdings.
Overall, our conclusion is consistent with the precautionary motive for cash holdings. We also find support for the notion that corporate transparency is a key factor in explaining a firm’s cash management policy, and in general, corporate policies.