Financial Statement Comparability and the Market Value of Cash Holdings

We examine how financial statement comparability affects the market value of cash holdings. Using a sample of U.S. firms from 1991 through 2013, we find that the marginal value of cash holdings is higher for firms with financial statements that are more comparable to those of their industry peers. Specifically, a change in our comparability measure from the bottom to the top decile is associated with a 37 to 43 cent increase in the market value of an additional dollar of cash. This result suggests that financial statement comparability mitigates the agency problem associated with cash holdings (i.e., the free cash flow problem) by improving firms' information environments and thus facilitating monitoring of managers.