The role of business strategy in corporate liquidity : evidence from US firms

• Main Author: Μαγεράκης, Ευστάθιος
• Other Authors: Τζελέπης, Δημήτριος
• Format: Thesis
• Language: English
• Published: 2018
• Subjects: Cash holdings; Business strategy; Speed of adjustment (SOA); Firm value; Ρευστά διαθέσιμα; Επιχειρηματική στρατηγική; Ταχύτητα σύγκλισης; Αποτίμηση επιχείρησης; 658.155

This thesis explores the association between cash holdings and business strategy for non-financial US firms, over a period from 1970 to 2016. Miles and Snow’s (1978, 2003) typology is used to construct the strategy index and explore the relation between strategies and corporate liquidity. Thus, we distinguish two extreme corporate strategies into Prospectors and Defenders, based on resource allocation and investment behavior patterns. Following the methodology of Bates et al. (2009) on cash holdings, data were analyzed using multiple regression analysis. Initially, the results suggest that strategy affects positively corporate liquidity. Regarding SOA, the estimated adjustment coefficient from dynamic panel model is about 0.475, indicating that a typical firm corrects a deviation from optimal cash holdings in 2,1 years (47.5%). Furthermore, the deviation from target cash is higher for Prospectors than Defenders, who adjust quicker to optimal cash levels. We conclude that cash-holding adjustment speed for prospectors who focus on innovation is slower than defenders, whose managers follow a cost reduction and more conservative financial policy. Next, it was applied a regression among firm value, capital structure and cash holdings. This study investigates the market value of cash held by firms. In general, we estimate the value of a marginal dollar of cash to be about $0.97. However, a significant difference in the firm valuation of the strategic types is found. In the sample of US non-financial and nonutility corporations, when firms’ excess cash holdings level is higher, the firm value is lower. As a result, prospectors hold more cash than defenders, that leads to a lower firm’s market value. The study contributes both to the cash literature and management literature since the core findings show that that strategic considerations are important in shaping cash policies of innovative firms. Substantiating the dynamic nature of business strategy and the optimal use of cash reserves facilitate a healthier corporate performance.