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Cash Holdings, Working Capital and Firm Value: Evidence from France

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Cash Holdings, Working Capital and Firm Value: Evidence from France
CASH HOLDINGS, WORKING CAPITAL AND FIRM VALUE: EVIDENCE FROM FRANCE
Ruta AUTUKAITE* – Eric MOLAY**

Abstract: Although companies deal with day-to-day short term financial decisions, in corporate finance the emphasis is being put on long term financial issues when talking about company’s value. In this paper a sample of French listed companies was chosen to assess the importance of short term financial decisions to company’s value by testing the following hypotheses: an extra euro invested in cash or net working capital is valued less than one euro. Running a panel data analysis, evidences prove that shareholders undervalue cash holdings and net working capital. The results of this paper alert management not to underestimate importance of cash holdings and working capital management; moreover, the results encourage investors to follow company’s actions in this area to maximise their return on investment.

Keywords: cash holdings, profitability, stock return, working capital.

JEL Code: G30 (Corporate Finance and Governance)

* EDHEC – 393 Promenade des Anglais, BP3116, 06202 Nice cedex 3, France (ruta.autukaite@edhec.com) ** University of Nice-Sophia Antipolis (IAE) – 24, av. des Diables Bleus, 06357 Nice cedex 4, France (eric.molay@unice.fr)

Electronic copy available at: http://ssrn.com/abstract=1836900

INTRODUCTION In academic literature, the firm’s total market value is described as the value of all its assets, namely, long term debt and equity. In 1958, Modigliani and Miller showed that in a perfect market capital structure does not matter, that it does not matter how much debt a company carries as long as the business generates sufficient cash flow to make it likely that it will meet its interest obligations. However, in reality firms operate in imperfect capital markets where there are transaction costs, taxes, bankruptcy and agency costs; all these factors make determination of optimal capital structure an important question firms need to


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