Deviation from Optimal Level of Cash Holdings and Cumulative Abnormal Returns

Abstract

The Present study investigates the relationship between deviation from optimal level of cash holdings and future performance in 188 active accepted firms of Tehran Stock Exchange (TSE) during 2003-2012. To do so, Opler et al. model was extended to determine optimal cash level and positive and negative deviation from optimal level of cash holding are applied as excess and sufficient cash. Also regression model with panel data is used to investigate the relationship between cash holdings and future performance. Furthermore, cumulative abnormal returns (CAR) variable is used as future performance indices. The results indicate that there is a negative and significant relationship between deviation from optimal level of cash holdings and future performance. It shows that companies which hold more or less cash than optimal cash will have lower investment returns.