This paper empirically investigates (1) the association between business strategy and abnormal cash position and (2) the future performance implications of abnormal cash holdings conditional on business strategy for a sample of US firms.
We use the firm-specific composite business score developed by Bentley et al. (2013) and examine its relationship with abnormal cash holdings. We employ the cash holding model of Opler et al. (1999) to determine the level of normal cash holdings with the residual being labeled as the abnormal cash holdings.
Using a sample of US firms, we confirm a positive and significant association between business strategy and abnormal cash holdings. We also reveal that a deviation from the estimated cash level can lead to an improved future performance but a prospector (defender) -type business strategy weakens (strengthens) the excess cash–firm performance relationship.
While the prior evidence show the effects of business strategies on corporate cash holding, there is no evidence of the association between business strategy and abnormal cash holdings and the performance implications of the strategy-cash holdings nexus. Hence, through the lens of business strategy, this study aims to fill this gap in the literature.
