Do Persistent Large Cash Reserves Hinder Performance?

Abstract Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We test this argument by examining the operating performance and other characteristics of firms that for a five-year period held more than one-fourth of their assets in cash and cash equivalents. Following the five-year period, operating performance of high cash firms is comparable to or greater than the performance of firms matched by size and industry or by a measure of proclivity to hold substantial cash. In addition, proxies for managerial incentive problems, such as ownership and board characteristics, are not unusual and do not explain differences in operating performance among high cash firms. We find that high cash holdings are accompanied by greater investment, particularly R&D expenditures, and by greater growth in assets. For firms that persistently hold large cash reserves, we conclude that such policies support investment without hindering corporate performance.

[1]  Bernadette A. Minton,et al.  Financial Conservatism: Evidence on Capital Structure from Low Leverage Firms , 2001 .

[2]  John R. Graham,et al.  How Big are the Tax Benefits of Debt , 2000 .

[3]  David C. Mauer,et al.  The Determinants of Corporate Liquidity: Theory and Evidence , 1998, Journal of Financial and Quantitative Analysis.

[4]  Atulya Sarin,et al.  Ownership and Board Structures in Publicly Traded Corporations , 1998 .

[5]  René M. Stulz,et al.  The Determinants and Implications of Corporate Cash Holdings , 1997 .

[6]  Ronald C. Anderson,et al.  Ownership Studies: The Data Source Does Matter , 1997, Journal of Financial and Quantitative Analysis.

[7]  W. Mikkelson,et al.  The decline of takeovers and disciplinary managerial turnover , 1997 .

[8]  Jarrad Harford,et al.  Corporate Cash Reserves and Acquisitions , 1997 .

[9]  Brad M. Barber,et al.  Detecting abnormal operating performance: The empirical power and specification of test statistics , 1996 .

[10]  Brian L. Betker,et al.  Liquidation Costs and Accounting Data , 1996 .

[11]  Diane Del Guercio.  The Distorting Effect of the Prudent-Man Laws on Institutional Equity Investments , 1996 .

[12]  D. Yermack,et al.  Managerial Entrenchment and Capital Structure Decisions , 1995 .

[13]  David J. Denis,et al.  Performance Changes Following Top Management Dismissals , 1995 .

[14]  A. Shleifer,et al.  What Do Firms Do with Cash Windfalls? , 1993 .

[15]  Kenneth A. Froot,et al.  Risk Management: Coordinating Corporate Investment and Financing Policies , 1992 .

[16]  W. Mikkelson,et al.  Managers' voting rights and corporate control , 1989 .

[17]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[18]  Clifford W. Smith.  INVESTMENT BANKING AND THE CAPITAL ACQUISITION PROCESS , 1986 .

[19]  W. Mikkelson,et al.  Valuation effects of security offerings and the issuance process , 1986 .

[20]  R. Lalonde.  Evaluating the Econometric Evaluations of Training Programs with Experimental Data , 1984 .

[21]  Clifford W. Smith.  Alternative methods for raising capital: Rights versus underwritten offerings , 1977 .

[22]  S. Myers.  Determinants of corporate borrowing , 1977 .

[23]  M. C. Jensen,et al.  Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit , 1976 .