Cash creates value for supply chain systems, but who appropriates that value?

Abstract

Cash enables firms to create value in the supply chain by increasing resiliency and facilitating adaptation and reliable fulfillment of contractual obligations, but who appropriates this value? We propose that cash-rich firms gain the bargaining power to appropriate value by obtaining more favorable terms from their trading partners, resulting in higher margins, shorter cash conversion cycles, and, ultimately, higher financial performance. Relational ties with trading partners, however, make firms more accommodating and forbearing, thus attenuating value appropriation by cash-rich firms. We test our hypotheses on a panel-data sample of Japanese keiretsu and non-keiretsu corporations using Hausman-Taylor instrumental variables regression models. The results provide strong support for our prediction that although cash creates value, resulting in higher margins, lower cash cycles, and higher financial performance, a firm’s ability to appropriate the value created by the cash it holds depends on the nature of its relationship with its trade partners.