Agency Costs, Information Asymmetry, and the Value of Cash Holdings

This study examines the relationship between the agency costs and the value of cash holdings, and whether this relationship is different depending on the information asymmetry. Firms with high agency costs are less likely to perform projects beneficial to firm value because managers in those firms use more cashes for their own profits. This effect is reflected better in the market with low information asymmetry. The results show that the cash holdings in the firms with high agency costs are less likely to be reflected to the firm value. Further, this effect is more severe for the firms listed in KSE market than the firms listed in KOSDAQ market, and is also more pronounced after the IMF foreign exchange crisis than before the crisis. These results support that when the information asymmetry is reduced, the stock market can evaluate the value of cash holdings more properly considering the agency costs.