Hostname: page-component-745bb68f8f-kw2vx Total loading time: 0 Render date: 2025-01-08T08:17:06.383Z Has data issue: false hasContentIssue false
  • English
  • Français

Do Persistent Large Cash Reserves Hinder Performance?

Published online by Cambridge University Press:  06 April 2009

Wayne H. Mikkelson  and
M. Megan Partch
Wayne H. Mikkelson
Affiliation:
[email protected], Both authors, Lundquist College of Business, University of Oregon, Eugene, OR 97403.
M. Megan Partch
Affiliation:
[email protected]., Both authors, Lundquist College of Business, University of Oregon, Eugene, OR 97403.
Get access Rights & Permissions [Opens in a new window]

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 38 , Issue 2 , June 2003 , pp. 275 - 294
Copyright
Copyright © School of Business Administration, University of Washington 2003

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Alderson, M., and Betker, B.. Liquidation Costs and Accounting Data.” Financial Management, 25 (1996), 25–36.CrossRefGoogle Scholar
Anderson, R., and Lee, D. S.. “Ownership Studies: The Data Source Does Matter.” Journal of Financial and Quantitative Analysis, 32 (1997), 311–329.CrossRefGoogle Scholar
Barber, B., and Lyon, J.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics.” Journal of Financial Economics, 41 (1996), 359–399.CrossRefGoogle Scholar
Berger, P.Ofek, E. and Yermack, D.. “Management Entrenchment and Capital Structure Decisions.” Journal of Finance, 52 (1997), 1411–1438.CrossRefGoogle Scholar
Blanchard, O.Lopez-de-Silanes, F. and Shleifer, A.. “What Do Firms Do with Cash Windfalls?” Journal of Financial Economics, 36 (1994), 337–360.CrossRefGoogle Scholar
Dehejia, R., and Wahba, S.. “Causal Effects in Nonexperimental Studies: Re-Evaluating the Evaluation of Training Programs.” Journal of the American Statistical Association, 94 (1999), 1053–1062.CrossRefGoogle Scholar
Del Guercio, D. “The Distorting Effect of the Prudent-Man Laws on Institutional Equity Investments.” Journal of Financial Economics, 40 (1996), 31–62.CrossRefGoogle Scholar
Denis, D., and Denis, D.. “Performance Changes Following Top Management Dismissals.” Journal of Finance, 50 (1995), 1029–1057.CrossRefGoogle Scholar
Denis, D., and Sarin, A.. “Ownership and Board Structures in Publicly Traded Corporations.” Journal of Financial Economics, 52 (1999), 187–223.CrossRefGoogle Scholar
Froot, K. “Intel Corporation, 1992: Teaching Note.” Harvard Business School 5–294-018 (1993).Google Scholar
Froot, K.Scharfstein, D. and Stein, J.. “Risk Management: Coordinating Corporate Investment and Financing Policies.” Journal of Finance, 48 (1993), 1629–1658.CrossRefGoogle Scholar
Graham, J. “How Big are the Tax Benefits of Debt?” Journal of Finance, 55 (2000), 1901–1941.CrossRefGoogle Scholar
Harford, J. “Corporate Cash Reserves and Acquisitions.” Journal of Finance, 54 (1999), 1969–1997.CrossRefGoogle Scholar
Harford, J., and Haushalter, D.. “Cash Flow Shocks, Investment, and Financial Constraint: Evidence from a Natural Experiment.” Unpubl. Paper, Univ. of Oregon (2000).Google Scholar
Jensen, M. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Kim, C.Mauer, D. and Sherman, A.. “The Determinants of Corporate Liquidity: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 33 (1998), 335–359.CrossRefGoogle Scholar
Lalonde, R. “Evaluating the Econometric Evaluations of Training Programs.” American Economic Review, 76 (1986), 604–620.Google Scholar
Maher, J. “Identification and Investigation of High-Cash Firms.” Unpubl. Paper, Pennsylvania State Univ. (1998).Google Scholar
Mikkelson, W., and Partch, M.. “Valuation Effects of Security Offerings and the Issuance Process.” Journal of Financial Economics, 15 (1986), 31–60.CrossRefGoogle Scholar
Mikkelson, W., and Partch, M.. “Managers' Voting Rights and Corporate Control.” Journal of Financial Economics, 25 (1989), 263–290.CrossRefGoogle Scholar
Mikkelson, W., and Partch, M.. “The Decline of Takeovers and Disciplinary Managerial Turnover.” Journal of Financial Economics, 44 (1997), 205–228.CrossRefGoogle Scholar
Minton, B., and Wruck, K.. “Financial Conservatism: Evidence on Capital Structure from Low Leverage Firms.” Unpubl. Paper, Ohio State Univ. (2001).Google Scholar
Myers, S. “Determinants of Corporate Borrowing.” Journal of Financial Economics, 5 (1977), 147–176.CrossRefGoogle Scholar
Myers, S., and Majluf, N.. “Corporate Financing and Investment Decisions when Firms Have Information that Investors Do Not Have.” Journal of Financial Economics, 13 (1984), 187–221.CrossRefGoogle Scholar
Opler, T.Pinkowitz, L.Stulz, R. and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 3–46.CrossRefGoogle Scholar
Smith, C. “Alternative Methods for Raising Capital: Rights versus Underwritten Offerings.” Journal of Financial Economics, 5 (1977), 273–307.CrossRefGoogle Scholar
Smith, C.. “Investment Banking and the Capital Acquisition Process.” Journal of Financial Economics, 15 (1986), 3–30.CrossRefGoogle Scholar