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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.
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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

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