The Impact of Business Strategy on Corporate Cash Policy

Purpose – The purpose of this study is to explore the association between cash holdings and business strategy for non-financial US firms, over the period from 1970 to 2016.Design/Methodology/Approach – We use Miles and Snow's (1978, 2003) theoretical background and follow Bentley et al. (2013) to construct the strategy index. Thus, we distinguish two extreme corporate strategies, Prospectors and Defenders, based on resource allocation and investment behavior patterns. Following the methodology of Bates et al. (2009) on cash holdings, we use multiple regression analysis to explore the relationship between strategy and corporate liquidity.Findings – The empirical results suggest that the business strategy index affects positively corporate liquidity. Furthermore, the deviation from the target cash seems to be higher for Prospectors than Defenders, who adjust quicker to the optimal cash levels. Cash-holding adjustment speed for Prospectors is slower than for Defenders'. As a result, Prospectors seem to hold more cash than Defenders, which results in a lower firm's market value. Research Limitations/Implications – The results of this work have valuable implications for researchers, who develop a conceptual framework to identify the firms' cash holding behavior of different strategic types. This study, however, is limited to US non-financial firms; future research could focus on an international sample of firms.Practical Implications – The findings of this paper could be useful to corporate managers, in order to pursue a successful business strategy and maximize firm value through the adoption of an effective liquidity policy. Strategic planning along with optimal cash management should guide firms to significantly improve their input's use efficiency and their default risk minimization.Originality/Value – The main contribution of this study emerges from the first-time investigation of the relationship between cash holdings and business strategy and the augmentation of the empirical research on the strategy's effect on cash policy, excess cash valuation, and hence, firm value