Effect of cash holding and earning quality towards firm's efficiency / Siti Julea Supar

Imperfect capital market highlights the important to have cash within a firm as cash serves as a cushion for any unexpected event in a future. However, failure in utilizing the cash within the firms may lead to agency conflict which consequently, would influence the firm’s value to drop. An investor is attracted to invest in that particular company and eventually will threaten the position of the manager. In turn, this situation may cause the manager to change some of the figures of earning in the financial report throughout the reporting period that will lead to poor earning quality in order for the manager to protect the position. The earning quality will influence the efficiency of the firms as the financial report will reflect the actual economic activity. Changes in financial report may lead to misallocation of resources and directly affect the efficiency of the firms. Therefore, this study employs two-stage regression (non-parametric and parametric method) of panel data from year 2001 to 2014 in order to assess the effect of cash holding and earning quality towards firm’s efficiency by sector in Malaysia as different sector will have different financial structure. Some approaches such as Accrual Quality and Data Envelopment Analysis (DEA) are used in the first stage of the regression (non-parametric). Generally, the findings showed that cash holding has no effect towards efficiency of firm in most sectors. On the other hand, it is found that macroeconomic variables do have strong impact towards the efficiency of firm in most sectors. Overall, each sector shows a different outcome in which it proves that each sector has different financial backgrounds.