Cash is surprisingly valuable as a strategic asset

Changhyun Kim · Richard A. Bettis

243 citations0/0 files storedStrategic Management Journal

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Corporate Finance and Governance Financial Markets and Investment Strategies Working Capital and Financial Performance

Abstract

Academics, politicians, and journalists are often highly critical of U.S . firms for holding too much cash. Cash holdings are stockpiled free‐cash flow and incur substantial opportunity costs from the perspectives of economics. However, behavioral theory highlights the benefits of cash holdings as fungible slack resources facilitating adaptive advantages. We use the countervailing forces embodied in these two theories to hypothesize and test a quadratic functional relationship of returns to cash measured by T obin's q. We also build and test a related novel hypothesis of scale‐dependent returns to cash based on the competitive strategy concept of strategic deterrence. Tests for both of these hypotheses are positive and show that returns to cash continue to increase far beyond transactional needs . Copyright © 2013 John Wiley & Sons, Ltd.

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References

1969Investigating Causal Relations by Econometric Models and Cross-spectral Methods 1984Corporate financing and investment decisions when firms have information that investors do not have 1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1997Capitalism, Socialism and Democracy 1985Competitive Advantage: Creating and Sustaining Superior Performance 1980Agency Problems and the Theory of the Firm 1985Competitive advantage, creating and sustaining superior performance 1996Agency costs of free cash flow, corporate finance, and takeovers

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