When More is Less: The Impact of Large Cash Holdings on the Recovery of Firms' Performance.
47 Pages Posted: 23 Sep 2012 Last revised: 3 Jun 2016
Date Written: June 2, 2016
The paper investigates the impact of cash holdings on firm performance following an abrupt performance decline. Cash rich firms underperform cash poor ones following the performance shock. Low cash firms cut-off their assets and tighten capital expenditure, whereas high cash firms do not follow this pattern. The effect is stronger for firms with high propensity of managerial entrenchment, and less severe for firms operating in competitive product market, with ample investment opportunities or large institutional holdings. The analysis provides evidence on the potential downside of large cash reserves even in the context when cash is presumably most needed.
Keywords: Cash holding policy; Restructuring activities; Performance shock
JEL Classification: G32, G34
Suggested Citation: Suggested Citation