The Impact of Complexity and Ambiguity of Accounting Disclosures on Corporate Cash Holdings

Abstract

This work aims to investigate the association of complex and vague information of accounting disclosures with firms’ cash holdings policy. The sample includes firm year observations from the annual reports of U.S. firms (10-Ks) for the period 1999 to 2016. Financial data obtained from the Compustat/Center for Research in Security Prices (CRSP) database are merged with qualitative data from textual analysis of the reports. The main finding of the study indicates that companies with complex and ambiguous reports tend to retain a higher level of cash to overcome the higher cost of raising external capital. This is in line with the agency motive and the precautionary motive theories from the cash holdings literature. The results of this research work provide further knowledge to researchers, managers, financial analysts, and investors as they contribute to the deeper analysis and comprehension of corporate cash holdings policy shedding the light on its association with accounting information quality. This work contributes to two growing strands of accounting literature: cash holdings literature and literature on the quality of corporate disclosures. Specifically, it adds empirical evidence to research questions that are not widely examined in the relevant literature, expanding the range of measures of complexity and ambiguity of accounting information that are used.