Explaining the Marginal Value of Cash: Emphasizing the Role of Overinvestment and Deviation from Target Leverage

Ahmadi, Maghferah; Aflatooni, Abbas; Zalaghi, Hassan

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year 17, Issue 67 (2025)

fa 2025, 17(67): 1-19

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Explaining the Marginal Value of Cash: Emphasizing the Role of Overinvestment and Deviation from Target Leverage

Maghferah Ahmadi¹

, Abbas Aflatooni ^*²

, Hassan Zalaghi²

1- Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamedan, Iran.
2- Department of Accounting, Faculty of Economics and Social Sciences, Bu-Ali Sina University, Hamedan, Iran.

Abstract: (58 Views)

Abstract
One of the main challenges in corporate liquidity management is determining the marginal value of cash holdings and the factors influencing it. This study examines the effects of overinvestment and deviation from target leverage on the marginal value of cash in firms listed on the Tehran Stock Exchange. Overinvestment often arises from agency problems that drive managers to allocate resources to low-return projects. On the other hand, deviation from target leverage reflects an imbalance in the capital structure, which can increase financial risk. The research data comprise 2,088 firm-year observations during the period 2007–2024, analyzed using regression models based on the Generalized Least Squares (GLS) estimator with firm-level clustered corrections. The results indicate that overinvestment has a negative and significant effect on the marginal value of cash, as inefficient resource allocation reduces the effectiveness of cash utilization. Likewise, deviation from target leverage weakens the marginal value of cash because departing from the optimal leverage level increases financing costs and reduces the firm’s financial flexibility. The findings highlight the importance of managing investment policies and capital structure to enhance liquidity efficiency and create shareholder value. Robustness tests using alternative model specifications confirm the main results and show consistency with the agency and trade-off theories.

Article number: 1

Keywords: Marginal value of cash, Overinvestment, Leverage deviation, Agency theory, Trade-off theory

Full-Text [PDF 789 kb] (58 Downloads)

Type of Study: Research | Subject: Special

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Ahmadi M, Aflatooni A, Zalaghi H. Explaining the Marginal Value of Cash: Emphasizing the Role of Overinvestment and Deviation from Target Leverage. fa 2025; 17 (67) : 1
URL: http://qfaj.mobarakeh.iau.ir/article-1-2899-en.html

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