Does peers’ valuation matter? Evidence from corporate cash holdings

Document Type

Article

Publication Date

1-1-2026

Abstract

We examine how peer firm valuations influence corporate cash holdings. Our analysis shows that firms hold more cash when their industry peers are highly valued. Specifically, a one-standard deviation increase in peer valuation is associated with a 3.35% rise in a firm’s cash holdings, corresponding to approximately 13.51% of the sample’s average cash ratio. This relationship remains robust after accounting for firm-level determinants of cash policy. The effect is particularly pronounced among financially constrained firms with strong governance. We argue that financially constrained firms respond more strongly to peer valuations because of their higher cost of external financing, while well-governed firms are more inclined to adjust their cash policies in response to market signals, reflecting stronger oversight and a greater capacity for forward-looking decisions. Overall, these findings suggest that managers incorporate peer valuation information into cash policy decisions, consistent with learning or benchmarking behavior.

Publication Title

Quarterly Review of Economics and Finance

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