THE JOURNAL OF FINANCE • VOL. LXI, NO. 4 • AUGUST 2006 Corporate Financial Policy and the Value of Cash

We examine the cross-sectional variation in the marginal value of corporate cash hold-ings that arises from differences in corporate financial policy. We begin by providing semi-quantitative predictions for the value of an extra dollar of cash depending upon the likely use of that dollar, and derive a set of intuitive hypotheses to test empirically. By examining the variation in excess stock returns over the fiscal year, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose greater cash distribution via dividends rather than repurchases. WHAT VALUE DO SHAREHOLDERS PLACE ON THE CASH THAT FIRMS HOLD, and how does that value differ across firms? While an extensive literature attempts to estimate the value of adding debt to a firm’s capital structure, the search for estimates of the value of additional cash has not received nearly as much attention. This is a non-trivial oversight considering that corporate liquidity enables firms to make investments without having to access external capita