세무와회계저널 | Do Cash Holdings of a Firm Investing in Research and Development Cause…

n this study, I examine the influence of cash holdings on sudden stock price movements in relation with research and development (R&D) investments. Higher cash holdings weaken monitoring from investors and enables managers to hide bad news from overinvestment. Because R&D investment is inherently uncertain, managers would want to particularly hide bad news regarding R&D investment. When the negative news is eventually known to investors, stock price would crash.

In this study, I test my conjectures using data from firms listed on the Korean Stock Exchange from 1985 to 2014. I find a positive relation between stock price crash risk and cash holdings using the R&D firm sample, but not in the results using non－R&D sample. Robustness tests show that endogeneity is not the driver of these results. However, stock price upward jump is not related to cash holdings because positive news is rarely hidden from market participants.

Prior studies on cash holdings do not directly investigate the effect of cash holdings on a firm’s opacity and valuation through investment and financing. This study contributes to the literature by addressing this aspect. Furthermore, unlike prior studies that suggest manager related attributes such as agency problems or managerial overconfidence as causes of stock price crash, this study suggests uncertainty of investment and/or financing activities as a potential reason for stock price crash.