6. Conclusion
In this study, we examine the relation between the intensity of fair value inputs and corporate cash holdings. We find that firms with high intensity of total fair value assets and liabilities tend to hold more cash. Our results are largely driven by the intensities of Level 1 and Leve 2 fair value inputs. We also find that our results are stronger for firms with more-able managers. Overall, our results suggest that increased use of fair value inputs reduces the reliability of accounting numbers and increases agency conflicts between managers and investors, leading to a high level of cash holdings.
To the best of our knowledge, this is the first study that directly examines the association between fair value inputs and corporate cash holdings. Our findings are consistent with the trade-off between relevance and reliability of accounting numbers. Our results have implications for different stakeholder groups. For example, our findings should interest shareholders by showing that the level of utilizing fair value inputs may affect the level of cash. Our study contributes to the debate over fair value accounting by showing the impact of fair value accounting on firm-level cash holdings. One limitation of our study is that the sample period (2008–2015) coincides with the financial crisis. Readers need to exercise caution when they attempt to generalize our findings.
