When Does Cash Matter?

Abstract

We examine the association between a firm’s cash holdings and its performance. Using a large sample of private companies, we find that the importance of cash for a firm’s performance varies substantially with its size and the conditions it faces. When there are negative shocks to industry or macroeconomic conditions, there is a positive association between cash holdings and performance for small firms. This association is much weaker for large firms. There is no association between cash holdings and performance for other types of conditions, regardless of the firm’s size. Consistent with the benefits from cash holdings depending on a firm’s ability – and willingness – to use external financing, small firms borrow less than large firms during negative shocks.