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.
cash, slack, strategic deterrence, behavioral theory, agency theory
Business | Strategic Management Policy
Strategy and Organisation
Strategic Management Journal
KIM, Changhyun and BETTIS, Richard A..
Cash is suprisingly valuable as a strategic asset. (2014). Strategic Management Journal. 35, (13), 2053-2063. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/4396
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