Publication Type

Journal Article

Publication Date

12-2014

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 Tobin'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.

Keywords

cash, slack, strategic deterrence, behavioral theory, agency theory

Discipline

Business | Strategic Management Policy

Research Areas

Strategy and Organisation

Publication

Strategic Management Journal

Volume

35

Issue

13

First Page

2053

Last Page

2063

ISSN

1097-0266

Identifier

10.1002/smj.2205

Publisher

Wiley

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

http://doi.org/10.1002/smj.2205

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