Impact of earnings quality on corporate excess cash

This study investigates the impact of earnings quality on the value of excess cash holdings using a dataset of 95 French firms over the period 2005–2020, totaling 1,520 firm-year observations. Motivated by the inconsistent evidence on whether excess cash is valued or discounted by investors, this research explores whether the quality of financial reporting can explain such differences in valuation. Our empirical findings demonstrate a strong positive relationship between high-quality accruals and the valuation of excess liquidity. Specifically, firms with more reliable and transparent earnings information experience a higher market valuation of their excess cash, suggesting that investors associate superior earnings quality with sound financial management and efficient capital allocation. Unlike prior studies that mainly focus on U.S. data or broader international samples, this paper provides novel evidence from the French market, highlighting the critical role of earnings quality in shaping investor perceptions of corporate liquidity.