Cash is surprisingly valuable as a strategic asset

Authors

  • Changhyun Kim,

    Corresponding author
    1. Strategy and Entrepreneurship Department, Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina, U.S.A.
    • Correspondence to: Changhyun Kim, Kenan-Flagler Business School, Strategy and Entrepreneurship, McColl 5506, CB #3490, Chapel Hill, NC 27599, U.S.A. E-mail: changhyun_kim@kenan-flagler.unc.edu

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  • Richard A. Bettis

    1. Strategy and Entrepreneurship Department, Kenan-Flagler Business School, University of North Carolina, Chapel Hill, North Carolina, U.S.A.
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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. Copyright © 2013 John Wiley & Sons, Ltd.

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