The More, the Merrier: The Performance Effects of Cash over the Business Cycle
Knudsen, Hage & Vethe (2023) The More, the Merrier: The Performance Effects of Cash over the Business Cycle. Scandinavian Journal of Management, 39 (1)
Cash has traditionally be regarding as a relatively uninteresting resource from a strategic perspective, because of its homogenous nature. In essence, if cash could give you an advantage, then essentially every firm would stash up on cash, and the advantage would be competed away. Research, however, shows that this is not the case, and especially not in economic downturn. In this study we test the performance effect of cash on a richer sample of firms and with different variables than previously studied - and find that more cash is essentially better in recessionary times.
This paper adds to the recent interest in the link between cash and firm performance, by studying how this relationship varies across boom- and bust cycles. We use data of Norwegian firms from a broad range of sectors in the period 2005-2015, and both replicate and extend previous findings on the relationship between cash and performance over the business cycle. We find that i) cash has a positive, but weakly diminishing effect on firm performance (ROA) throughout the entire sample period, and ii) that the curvilinear relationship between cash and firm performance is the most pronounced in the pre-recession years, while it is virtually linearly positive in recessions and post-recession periods. We conclude that cash indeed has a substantial impact on firm performance, and especially so in recessionary times, and that the importance of cash is understated in much traditional strategy and finance theory.