The market value of cash holdings from related‐party sales: The role of source of cash flows

This paper finds that investors evaluate cash holdings differently based on the source of cash flows. Using cash flows from related‐party sales as a proxy for diverse sources, we find that shareholders discount the value of cash holdings for firms with higher cash flows from related‐party sales. We find that firms use related‐party sales cash flows differently; cash flows from related‐party sales are more likely to be retained as internal cash reserves or distributed as dividends, rather than utilised for necessary investments. We further document a negative valuation of investments for firms with more related‐party sales.