Is cash king? Market performance and cash during a recession

Robert S. Nason and Pankaj C. Patel

Journal of Business Research, 2016, vol. 69, issue 10, 4242-4248

Abstract: During a recession firms face a dilemma between investing cash to take advantage of emerging opportunities and holding cash to buffer against the crisis. Given this tension, we ask: Is cash king during a recession? Using a sample of publicly traded manufacturing firms between 2004 and 2010, we use peer cash holdings to instrument for cash and examine whether the curvilinear relationship between cash and stock market performance (Tobin's Q) changes during the economic crisis. We find that the before-recession benefits of cash decline at very high levels of cash holdings (.9 of total assets), whereas the during-recession benefits begin to decline at medium levels of cash holdings (.4 of total assets). Our results reveal that the nature of the curvilinear relationship between cash and market performance shifts from a diminishing returns curve before-recession to a more pronounced inverse U-shaped relationship during-recession.

Keywords: Cash holdings; Economic recession; Firm market performance; Curvilinear effects (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (28)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbrese:v:69:y:2016:i:10:p:4242-4248

DOI: 10.1016/j.jbusres.2016.03.001

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