I Want to Marry Rich: Why Cash Makes You a Desirable Partner

Abstract

AbstractBoth academics and practitioners frequently argue that ‘excessive’ firm cash reserves are likely to be squandered and thus may actually be detrimental to firm performance. Contrary to this narrative, we show that large cash reserves can have strong benefits for firms. Specifically, being cash‐rich helps firms form more strategic partnerships because cash helps assure potential partners that the focal firm will be able to adapt to unfolding contingencies. This assurance is particularly relevant in industry conditions that make disruptions either more likely or more costly. We explain how such disruptions arise due to uncertainty about partners' behaviours and thereby extend the literature in the area of transaction cost economics by shifting the focus from intentional opportunism to encompass unintentional factors that can impede a firm's ability to honour partnership agreements. This shift highlights a beneficial role of excess cash that is often overshadowed by the popular narrative on its wastefulness.