Cash looks simple. A dollar on a balance sheet should be worth a dollar to shareholders. Yet anyone who has watched markets place wildly different premiums—or discounts—on cash-rich companies knows it isn’t so tidy. The rise of cash balances over the past few decades has only made the question more urgent: how should investors value “excess” cash, the portion that isn’t needed to keep the lights on? Academic work shows the answer hinges on governance, financing frictions, and what managers are likely to do with the money.

Start with definitions. Firms hold cash for transactions (to pay bills), for precaution (to cushion shocks), and sometimes for speculation (to pounce on opportunities). Classic research documents that companies with riskier cash flows and richer growth options tend to carry more cash, while those with better access to capital markets carry less. In other words, some cash is “operating”—part of working capital needed to run the business—and some is true surplus. Your first task as an analyst is to separate the two.

Two valuation frameworks then come into play. In enterprise-value multiples, subtract only the cash you judge to be surplus; operating cash belongs with the business that generates EBITDA. In discounted cash flow, treat non-operating cash as a separate asset added to operating value at the end, adjusted for any taxes or restrictions. Because many companies manage toward minimal daily cash using credit facilities, the operating slice may be smaller than it appears—though that varies with volatility and bargaining power with lenders.

But the thorniest issue isn’t arithmetic. It’s that a dollar of cash is not always worth a dollar to equity investors. Michael Faulkender and Rong Wang showed that the marginal value of cash varies with a firm’s leverage, dividend status, and growth opportunities. When financing is tight or taxes bite, markets may value an incremental dollar below par; when constraints are acute and opportunities are rich, the market can value cash above par because it keeps the firm out of costly external finance. Context drives the cash multiple.

Governance is the second big lever. Amy Dittmar and Jan Mahrt-Smith compared well- and poorly governed firms and found that markets apply a steep discount to cash where shareholder protections are weak and agency problems loom. Not only is the value of cash lower in such firms, but the cash also tends to be spent quickly in ways that dent operating performance—think value-destroying acquisitions or empire building. For well-governed firms, by contrast, the haircut is far smaller.

Country-level institutions matter too. Lee Pinkowitz, René Stulz and Rohan Williamson documented that in jurisdictions with poor investor protection, the link between cash and firm value is markedly weaker. A cross-border conglomerate with “trapped” cash in such regimes may deserve an additional discount to reflect the risk that cash won’t make it back to shareholders intact—or on time.

Financing frictions can push the valuation in the opposite direction. Douglas Denis and Valeriy Sibilkov showed that for financially constrained firms, cash is especially valuable because it supports investment when external funds are costly or unavailable. In that world, a surplus dollar today can preserve high-NPV projects tomorrow—a reason markets sometimes pay more than a dollar for a dollar of cash at firms facing binding constraints but credible growth.

Layer on secular forces. Research by Thomas Bates, Kathleen Kahle and René Stulz traced the long-run rise in corporate cash ratios to riskier cash flows, leaner inventories and receivables, and more R&D intensity. That shift means the “operating” cash floor isn’t static: firms in volatile, R&D-heavy industries may structurally need more cash, leaving less that you can fairly call excess. A rule of thumb borrowed from yesterday’s manufacturing balance sheets can be badly misleading in today’s asset-light economy.

So how to put it all together in practice? Begin by estimating operating cash needs from seasonality, supplier terms, and access to committed credit. Treat what remains as non-operating. Then stress-test that number through three lenses. First, governance: board independence, payout history, incentive design, and acquisition discipline—if the record hints at cash burn rather than capital returns, apply a haircut. Second, financing conditions: constrained, high-beta firms with credible investment pipelines may justify valuing incremental cash at or even above par; mature, overcapitalized firms facing thin reinvestment prospects probably do not. Third, geography and tax: cash that is encumbered by capital controls, repatriation frictions, or minority-shareholder conflicts should be discounted accordingly.

The upshot is that “excess” cash isn’t a plug number you yank out of enterprise value and forget. It is a contingent claim on management behavior and market frictions. When protections are strong and strategy is disciplined, a dollar is close to a dollar. When agency costs loom, the discount bites. And when financing is scarce but opportunities are real, that same dollar can be the cheapest growth capital a company will ever raise. For investors, the craft lies not in finding cash, but in judging what the people in charge are likely to do with it.