||Cash Asset Management and Audit Quality
||Department of Accountancy
According to the theoretical concepts for tunneling behaviors and free-cash-flow agency problems, the entrenched managers may engage in value-destroying activities through the accessibility and discretion of cash holdings. Thus, it is extremely important to monitor the efficient use of cash assets and to understand the impact of cash holdings on firm value. This study examines the effect of different audit quality or characteristics on the marginal value of cash assets for U.S. publicly traded firms during the period from 1991 to 2010. Not only does the efficiency of cash asset management reflect firm value through internal governance process, but it may also affect market value through external monitoring function. Higher audit quality provides more credible financial information and enhances the assurance value of the audit. The empirical results find that the marginal value of cash assets is higher for firms with Big 4 auditors than firms with non-Big4 or only Second-tier auditors. Moreover, firms with industry specialist auditors exhibit a greater premium for an extra dollar of cash assets compared to non-specialist auditors. The conclusions hold after performing propensity score matching to alleviate the endogenity of auditor selection and are robust after controlling for the post-SOX period, auditor switches, and corporate governance. This evidence suggests that the efficiency of cash asset management and the reduction of agency costs can contribute to firm value through higher quality audits. Thus, external auditors also serve as the financial gatekeepers of firms’ cash assets.
TABLE OF CONTENTS v
LIST OF TABLES vi
1. Introduction 1
2. Literature Review and Hypothesis Development 8
2.1 Main Theories of Cash Holdings 8
2.2 Cash Holdings and Agency Problems 9
2.3 The Marginal Value of Cash Holdings 12
2.4 The Role of External Auditors in Cash Asset Management 14
2.5 Differentiated Audit Quality 16
2.6 Hypothesis Development 18
3. Data and Methodology 20
3.1 Sample Selection 20
3.2 Main Empirical Model and Variable Deﬁnition 21
3.3 Descriptive Statistics 24
4. Main Empirical Results 25
4.1. Change in Cash Holdings Analysis 25
4.2. Excess Cash Assets Analysis 27
5. Robustness Checks 29
5.1 The impact of the post-SOX environment 29
5.2 The Potential Effect of Auditor Switches on the Value of Cash Assets 30
5.3 Corporate Governance and the Market Value of Cash Assets 33
5.4 Propensity Score Matching for Endogeneity 35
6. Conclusions 38
APPENDIX: Variable Definitions 68
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