The Impact of Cash Holding Decisions on Firm Performance in the IT Industry

Jaeseong Lim () and Bong Keun Jeong
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Jaeseong Lim: D. Wyatt Henderson Department of Accounting, E. Craig Wall Sr. College of Business Administration, Coastal Carolina University, Conway, SC 29528, USA
Bong Keun Jeong: Department of Management and Decision Sciences, E. Craig Wall Sr. College of Business Administration, Coastal Carolina University, Conway, SC 29528, USA

JRFM, 2025, vol. 18, issue 11, 1-24

Abstract: This study examines the relationship between corporate cash holdings and firm performance within the IT industry, which is characterized by intense competition and rapid technological advancements. We propose an integrated framework that combines principal component analysis (PCA), machine learning (ML) algorithms, and Shapley additive explanation (SHAP) values to estimate and interpret model outcomes. Based on 21,051 corporate financial statement data items from 2004 and 2023, the empirical evidence supports an inverted U-shaped relationship between cash holdings and profitability, suggesting that holding either too little or too much cash is suboptimal. Among the tested models, the random forest demonstrates the highest explanatory power (R 2 ) and the lowest prediction errors (RMSE), outperforming the traditional ordinary least squares (OLS) regression by explaining 47% more variance. Our findings provide practical implications for researchers and stakeholders interested in enhancing corporate risk management and performance.

Keywords: cash holdings; IT firm performance; master proxy; machine learning; SHAP (SHapley Additive exPlanations) (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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