Do Persistent Large Cash Reserves Lead to Poor Performance?

Abstract

Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We examine 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, industry, or prior performance. 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 conclude that persistent large holdings of cash and equivalents have not hindered corporate performance.