Excess cash holdings and firm performance in new and old economy firms

Dhruba Banjade and J. David Diltz

The Quarterly Review of Economics and Finance, 2022, vol. 86, issue C, 124-133

Abstract: This study examines the relationship between excess cash holdings and firm performance in new and old economy firms. Firm value increases with cash on hand to a point, but it declines as cash balances exceed an empirically estimated threshold we term “the optimal level”. We find that firms with weak corporate governance mechanisms hold more cash than firms with strong ones. Cash holdings decrease by nearly four percent as bank ownership increases by one percent. New economy firms spend more on research and development activities, and they hold nearly six percent more cash than old economy firms. Results strengthen when we control for year and industry effects.

Keywords: Firm performance; Optimum cash; Ownership; Excess cash; Research and development; Cash flow (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:86:y:2022:i:c:p:124-133

DOI: 10.1016/j.qref.2022.06.006

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