The impact of business strategy on corporate cash policy

Abstract

PurposeThe purpose of this study is to explore the association between cash holdings and business strategy for nonfinancial and nonutility US firms over the period from 1970 to 2016.Design/methodology/approachThe authors have used Miles and Snow's (1978, 2003) theoretical background and followed Bentley et al. (2013) to construct a strategy index. Thus, the authors have distinguished two extreme corporate strategies, prospectors and defenders, based on a firm's resource allocation and investment behavior patterns. Following the methodology of Bates et al. (2009), the authors have used the multiple regression analysis to explore the relationship between business strategy and corporate cash holdings.FindingsThe empirical results show that business strategy is positively related to cash holdings. Prospectors are more likely to hold higher cash levels than defenders. Furthermore, the authors have found that cash holding's speed of adjustment (SOA) is slower for prospectors than for defenders, suggesting that business strategy influences cash holding's trend. Interestingly, the results show that the market value of cash increases significantly only for the firms that pursue a defender strategy.Research limitations/implicationsThe results of this work have valuable implications for researchers, by unveiling the relationship between corporate strategy and firm's cash holdings. This study, however, is limited to a sample of US firms; empirical evidence based on international samples of firms would add value to the current literature.Practical implicationsThe findings could be useful to financial managers and investment strategists, who seek to maximize firm value through the adoption of an effective liquidity policy. What is more, this study provides support for the view that strategic choice and optimal cash management are of great importance for firms' market value.Originality/valueThis study enriches the knowledge of business strategy's impact on financing policy of firms and contributes to the empirical literature of cash holdings' determinants. In addition, it complements previous studies on US firms by documenting the effect of business strategy on the SOA in cash holdings and firm value.

Business strategy, intellectual capital, firm performance, and bankruptcy risk: evidence from Oman's non-financial sector companies

“…The company's business strategy is measured using the typologies proposed by Miles et al (1978) and Miles and Snow (2003). Consistent with prior studies (Bentley et al , 2013; Higgins et al , 2015; Lopo and Ferreira, 2019; Magerakis and Tzelepis, 2020), six indices are constructed to measure business strategies. The six variables are: (1) R&D_S measures the research and development expenditure over sales.…”

“…Table 1 shows that Muscat Securities Market (MSM) has 117 firms listed under the financial, services, and industrial sectors. As the financial sector is heavily regulated and implements stricter accounting treatment compared to the non-financial sector, these are excluded from the sample (Agustia et al , 2020; Magerakis and Tzelepis, 2020; Fama and French, 1992). The data set comprises 380 firm observations collected from 2015 to 2019.…”

“…The companies are featuring from nine Standard Institutional Classification (SIC) codes that include: (1) Division A: Agriculture, Forestry, And Fishing; (2) Division B: Mining; (3) Division C: Construction; (4) Division D: Manufacturing; (5) Division E: Transportation, Communications, Electric, Gas, And Sanitary Services; (6) Division F: Wholesale Trade; (7) Division G: Retail Trade; (8) Division H: Finance, Insurance, And Real Estate (includes real estate only); and (9) Division I: Services. To evaluate the business strategies, strategy scores of each company are evaluated by taking the preceding five years average, as suggested in the prior studies (Magerakis and Tzelepis, 2020; Higgins et al , 2015).…”

“…ROA is measured as the ratio of earnings before interest and tax divided by the total assets (Kao et al , 2019; Anwar and Hasnu, 2016; Navissi et al , 2016; Acquaah, 2013; Jiang and Zhang, 2018; Liu et al , 2018). ROE is measured as the ratio of net income divided by the book value of equity (Dalwai and Mohammadi, 2020; Magerakis and Tzelepis, 2020; Anwar and Hasnu, 2016; Ren et al , 2019).…”

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“…They implied that the level of state ownership would decide the risk-taking behaviour and also lead to changes in business strategies. In turn, the changes in business strategies impact the cash holdings strategies (Magerakis & Tzelepis, 2020). Therefore, the role of state ownership in enterprises is still an interesting topic of debate, especially in socialist-oriented economies.…”