Cash holdings of companies are a surprisingly strong contributor to firm value
Every company needs to maintain a certain amount of liquid assets, i.e., cash, in order to carry out transactions in its daily business. However, too much cash can also indicate that a company no longer sees investment opportunities. So how much cash should a company ideally hold?
Previous research has found a positive relationship between cash holdings and firm value, but with decreasing marginal returns. In their new study in Journal of Management Scientific Reports, Maximilian Theissen and Prof. Dr. Lorenz Graf-Vlachy, together with co-authors from WHU and Ivey Business School, replicate and extend this research. Just like previous research projects, they also find a positive correlation between cash and firm value, but with increasing marginal return, suggesting that more cash increases firm value in an increasing fashion. The authors examine possible explanations for these surprising results.
Read the entire study here: https://journals.sagepub.com/doi/10.1177/27550311231187318