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Contemporary Accounting Research Vol. 41 No. 2 2024

Are firms as liquid as they appear in annual reports?

Abdul-Rahman Khokhar1; Jiaping Qiu2,3; Mohammad M. Rahaman1

1 Sobey School of Business Saint Mary's University Halifax Nova Scotia Canada · 2 Dishui Lake Advanced Finance Institute Shanghai University of Finance and Economics Shanghai China · 3 DeGroote School of Business McMaster University Hamilton Ontario Canada

open access

Abstract

Fiscal‐year‐end cash holdings are an important indicator in external stakeholders' assessment of a firm's liquidity and credit risk. Do fiscal‐year‐end cash holdings reflect a firm's intra‐year liquidity conditions? We observe that firms report significantly higher cash holdings in the fourth fiscal quarter, followed by a subsequent reversal. This pattern is pervasive across industries, persistent over time, and not explained by conventional factors or calendar effects. The extent of the fourth‐quarter cash increase is more pronounced for informationally opaque firms reliant on external markets and those with financial constraints and reduced monitoring. We investigate firms' real, financing, and timing activities that could potentially account for this pattern. Our study suggests that a complete picture of intra‐year cash holdings dynamics is necessary for external stakeholders to fully assess a firm's liquidity and credit conditions.

DOI
10.1111/1911-3846.12929
Volume
41
Issue
2
Pages
944-975
Language
en
Sources
bibtex:phds-export.bib crossref openalex

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