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The impact of business strategy on corporate cash policy

Article  in  Journal of Applied Accounting Research · June 2020

DOI: 10.1108/JAAR-05-2019-0077

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The impact of business strategy on Business

strategy and
corporate cash policy cash policy
Efstathios Magerakis and Dimitris Tzelepis
Department of Economics, University of Patras, Patras, Greece

Abstract
Received 4 May 2019
Purpose – The purpose of this study is to explore the association between cash holdings and business strategy Revised 7 October 2019
for nonfinancial and nonutility US firms over the period from 1970 to 2016. 11 December 2019
Design/methodology/approach – The authors have used Miles and Snow’s (1978, 2003) theoretical Accepted 10 January 2020
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.
Findings – The 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/implications – The 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 implications – The 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/value – This 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.
Keywords Cash holdings, Business strategy, Prospectors, Defenders, Speed of adjustment (SOA), Firm value
Paper type Research paper

1. Introduction
In this study, we examine whether the cash holding decision differs significantly among firms
as a result of the followed business strategy. The motivation for this research work stems
from the important implications for financial management, given the strategic effects of cash
holdings. Cash is considered an asset of great strategic importance; as a result, publicly
traded US firms have increased their cash reserves dramatically since the mid-1990s. There
are various reasons why a firm may hold cash; these reasons spin around precautionary,
transaction, tax and agency motives (Bates et al., 2009). Under the challenge of the optimal
capital structure, the definition of the optimal cash level through balancing the costs and
benefits of holding cash should be one of the most important corporate decisions (Drobetz and
Gr€uninger, 2007; Opler et al., 1999).

JEL Classification — L21, G32, D21, M41

The research work was supported by the Hellenic Foundation for Research and Innovation (HFRI)
Journal of Applied Accounting
under the HFRI PhD Fellowship grant (Fellowship Number: 299). The authors would like to thank the Research
editor, Dr. Julia Mundy, the assistant editor and the two anonymous referees for their valuable comments © Emerald Publishing Limited
0967-5426
which improved the manuscript significantly. Remaining errors are the authors’ responsibility. DOI 10.1108/JAAR-05-2019-0077
JAAR Although recent studies examine the influence of business strategy on financial reporting
indiscretions and audit fees (Bentley et al., 2013), tax aggressiveness (Higgins et al., 2015),
firm’s information environment (Bentley-Goode et al., 2017), over/underinvestment (Navissi
et al., 2017), future crash risk (Habib and Hasan, 2017), 10-K annual report readability (Habib
and Hasan, 2018) and firms’ market value in R&D-intensive industries (Ballas and
Demirakos, 2018) and the effect of business strategy in the cash holding decision have been
remarkably ignored. In this study, the Miles and Snow’s (1978, 2003) typology is adopted
because of its strong theoretical background. A sample of US firms is derived from the
Compustat database for the extensive period 1970–2016. Following Bates et al. (2009), we
adopted the ratio cash to total assets as a measure of cash accumulation. Overall, we include,
among others, 14 determinants in the model, namely, firm size, investment and growth
opportunities, leverage, profitability, liquidity substitution, dividends and industry
competition. The strategy variable is computed with the procedure proposed by Bentley
et al. (2013) to investigate whether there are incremental effects on cash policy.
The findings suggest a positive and statistically significant relationship between cash
holdings and business strategy. Specifically, prospectors are more likely to hold higher levels
of cash than defenders. Additionally, the speed of cash holding adjustment for the relevant
strategy types is examined. Consistent with the prior literature, our empirical analysis
indicates that it takes approximately 2.1 years on average for a nonfinancial US firm to close
the gap between current and optimal cash ratio. Finally, the market value of cash reserves for
firms following different strategies is investigated. We find that the market value of cash is
higher for defenders than the average US firm.
The present study makes the following contributions to the research stream in the field.
First, this work complements the empirical literature on the factors that significantly
influence the level of cash holdings (e.g. Bates et al., 2009; Opler et al., 1999) and provides a
better understanding of how business strategy affects corporate decisions (e.g. Bentley et al.,
2013; Sarac et al., 2014), by exploring the effect of business strategy in the cash holding trend,
which has been overlooked by the prior literature. Second, it provides results for the
adjustment speed of cash holdings confirming the previous findings of Orlova and Rao (2018)
and Venkiteshwaran (2011). Making a step further, the study adopts a measure of business
strategy, which captures firm-level differences with respect to the deviation between the
estimated and the target cash. Third, drawing on Dittmar and Mahrt-Smith (2007), the
present work contributes to the relevant literature by documenting that the market value of
cash depends on the followed business strategy.
The remainder of the paper is structured as follows: Section 2 describes the prior literature
and develops the hypotheses, while in Section 3 the research methodology can be found,
where the relevant measurements are described. Moving on to Section 4, the data and
descriptive statistics are analyzed. The empirical results are presented in Section 5, along
with discussion. Finally, Section 6 concludes the paper.

2. Literature review and hypotheses development

2.1 Cash holdings and business strategy
Corporate financial managers need to shape the optimal cash policies to finance
organizational goals. Considering the cash inflows in a firm, a financial manager may
choose to distribute the cash to investors, reinvest the cash or keep the cash in the firm. Prior
literature indicates that most managers often prefer to hold a significant part of the firm’s
assets in the form of cash or other liquid securities since a firm may benefit from saving
transaction costs when it needs to raise funds (Acharya et al., 2012; Fernandes and
Gonenc, 2016).
 Almeida et al. (2014) argue that sufficient corporate liquidity enables a firm to involve in Business
value increasing investments. However, it is costly for a firm to hold liquid assets; holding strategy and
cash has a low rate of return due to taxation and liquidity premium cost, plus the hidden
opportunity costs (Wu et al., 2012). The management determines the optimal amount of firm’s
cash policy
cash holdings, weighing the marginal cost and benefit of the cash accumulation (Opler et al.,
1999). Therefore, the level of corporate liquidity stands out among the most significant
decisions in which financial managers should engage.
A strategic response to firms’ challenge of performance and winner’s advantage is
proposed by Miles and Snow’s (1978, 2003) typology, which classifies firms into four distinct
categories: defender, analyzer, prospector and reactor [1]. Miles and Snow (1978) and
Hambrick (1983) supported that prospectors continuously engage in new product research
and market development. Moreover, this type of strategy often chooses innovation over
efficiency and adapts better to market risk and industry volatility. On the other hand,
defenders emphasize on cost minimization and operating efficiency instead of innovation
(Bentley, 2013; Higgins et al., 2015).
Following Miles and Snow’s (1978, 2003) theoretical backdrop, we predict that defenders
and prospectors have distinct traits that lead to differences in the cash accumulation decision.
For the formulation of our first research question, we assume that each firm is assigned a
unique strategy trait (i.e. prospector or defender). Specifically, the different approaches of the
two strategies in risk aversion, product and market exploitation should result in prospectors
staggering more cash than defenders. Therefore, we summarize the following hypothesis:
H1. Ceteris paribus, prospectors accumulate higher cash holdings than defenders.

2.2 Cash holdings, business strategy and speed of adjustment (SOA)

Numerous studies have investigated cash holdings to designate their optimal level under the
trade-off theory of capital structure for US firms (Orlova and Rao, 2018) and non-US firms
(Orlova and Sun, 2018). Trade-off theory supports that firms measure the gains and costs of
hoarding cash to determine the optimal cash levels (Ferreira and Vilela, 2004; Opler et al.,
1999). Consequently, when the cash reserves differ substantially from the optimal level, firms
are expected to adjust their cash reserves to the target level.
Miles and Snow’s (1978, 2003) theoretical framework supports that prospectors pursue
continuous product and market exploitation, high adaptability and high cash flow volatility.
As a result, we expect that prospectors are more likely to suffer from higher agency costs and
information asymmetry and higher transaction costs than defenders. Thus, we predict that
prospectors’ (defenders’) higher (lower) need of cash should result in higher (lower) deviation
from the optimal level of the firm’s cash reserves. Hence, the following hypothesis can be
derived:
H2. Ceteris paribus, the deviation of actual to target cash holdings is larger for
prospectors than for defenders.

2.3 Cash holdings, business strategy and firm value

Numerous empirical studies have examined the impact of cash holdings on firm value, but the
results remain ambivalent. Both theoretical and empirical analyses show that different
companies have dissimilar levels of demand for cash and various financial constraints.
Several authors have studied the change of the value of one additional dollar in cash for
various financial policies (e.g. Dittmar and Mahrt-Smith, 2007; Faulkender and Wang, 2006).
Their empirical results suggest that the marginal value of one dollar in cash is valued less
than one dollar in the market. The evidence from Kalcheva and Lins (2007) confirms a
negative correlation between a firm’s market value and cash holdings.
JAAR Another study from Pinkowitz and Williamson (2007) provided evidence that excess cash
holdings have a positive effect on companies’ operating performance. This finding confirms
pecking order theory, which states that higher cash reserves reduce the high costs caused by
asymmetric information, insufficient investment and external financing. Combining the
theoretical approaches from the cash management and the business strategy literature, we
assume that defenders might have a higher value of cash holdings than prospectors.
Consequently, we formulate the following hypothesis:
H3. Ceteris paribus, the market value of cash holdings is higher for defenders than for
prospectors.

3. Variable measurements and the research design

3.1 Variable measurements
3.1.1 Dependent variable: cash to total assets. Following Bates et al. (2009), we define cash
holdings as cash and cash equivalents divided by total assets [2].
3.1.2 Business strategy measurement. Following Bentley et al. (2013), the measure is
constructed from the following six variables: (1) the research and development (R&D)
expenditures over sales ratio, as a firm’s tendency to invest resources in innovation and
develop new products, (2) the ratio of employees to sales, as a proxy for production and
distribution efficiency, (3) the annual change in total sales, as a proxy for historical growth
and investment opportunities, (4) the selling, general and administrative expenses (SG&A) to
sales ratio, to predict firm’s marketing efforts and commitment to utilizing new products and
services, (5) the standard deviation of the number of employees, as a proxy for organizational
stability and (6) the ratio of property, plant and equipment divided by total assets, as a proxy
for capital intensity and technological efficiency. Each of the six ratios is computed for each
firm i using the previous five-year rolling average (Bentley et al., 2013).
Next, we formulate quintiles per two-digit Standard Industrial Classification (SIC)
industry year group and sort each of the ratios accordingly. Based on the rankings of the six
variables, the firm-year observations sorted in the highest quintiles are given a score of 5,
while those in the lowest quintiles are given a score of 1. The strategy score is constructed by
summing the scores of the six variables for each firm year. Therefore, the composite score
ranges in minimum and maximum value from 6 to 30, respectively. Consistent with Miles and
Snow’s (1978, 2003) organizational theory, US firms are classified by the following strategy
types: defenders (6–12), prospectors (24–30) that are closer to the endpoints, while the middle
belongs to the analyzers (13–23).
3.1.3 Control variables. In the frame of the empirical analysis, we include in the
econometric models a set of control variables derived from a thorough study of the literature,
defined as follows:
(1) Leverage. We measure leverage as the extent of total debt to the firm’s total assets,
where total debt includes long-term debt plus short-term debt. Firms are expected to
use cash to decrease leverage in debt-constrained financial environments, causing a
negative association between cash and leverage (Bates et al., 2009; Ferreira and
Vilela, 2004).
(2) Net working capital to assets. The measure used is calculated as current assets minus
cash and cash equivalents minus current liabilities, scaled by total assets. Oler and
Picconi (2014) validate the negative relationship between liquid assets’ substitutes
and cash holdings.
(3) Cash flow to assets. We calculate cash flow as earnings after interest, dividends and
taxes before depreciation divided by total assets. Cash flow to assets is used as a
 proxy of financial performance since companies that generate a significant amount Business
of cash flows are likely to hoard cash, hence a positive association is expected (Opler strategy and
et al., 1999).
cash policy
(4) The firm size. Following the prior literature, the firm size is used as an agent of
financial constraints, measured by the natural logarithm of total assets. As proposed
by trade-off theory there are economies of scale to holding cash, hence the negative
association between the firm size and cash ratio has been proposed from the
literature (Bates et al., 2009).
(5) Market-to-book ratio. Market to book is defined as the ratio of the firm’s market value
of assets to its’ total assets, predicting a firm’s future growth opportunities. Firms
with high investment opportunities are prone to accumulate cash to avoid the costs
of external financing (Ferreira and Vilela, 2004; Opler et al., 1999).
(6) R&D to sales. R&D is calculated as the ratio of research and development expenses
scaled by sales, a proxy either for investment and growth opportunities. Opler et al.
(1999) and Bates et al. (2009), among others, found that firms with higher R&D
expenditures hold more cash than firms with low R&D costs.
(7) Capital expenditures to assets. Capital expenditures are measured as the firm’s capital
expenditures deflated by total assets. Based on pecking order theory, a negative
relationship between capital expenditures and cash holdings is predicted; capital
expenses increase investment and decrease corporate liquidity (Ferreira and Vilela, 2004).
(8) Acquisitions to assets. Acquisition activity is defined as acquisition expenses to total
assets, reflecting the firm’s investment activity. Following the previous study of Oler
and Picconi (2014), a negative sign on this coefficient is expected.
(9) Debt issuance. Net debt issuance is computed as annual long-term debt issuance minus
annual long-term debt reduction for a firm relative to total assets (Bates et al., 2009).
(10) Equity issuance. Net equity issuance is relative to assets. Net equity issuance is
computed as the difference between sales of common and preferred stock minus
equity repurchases scaled by total assets (Bates et al., 2009). Since both the equity
and the debt issuance constitute the major channels of external financing, we expect
them to have a positive relationship with firm cash holdings.
(11) Loss dummy. We adopt a binary variable as a proxy for firm profitability that takes
the value of 1 when return on equity (ROE) is negative (loss-making firms) in a given
year and 0 otherwise (Bates et al., 2009). A negative association between cash
holdings and loss dummy is expected.
(12) The Herfindahl–Hirschman Index. Following previous studies, the Herfindahl–
Hirschman Index (HHI) is used as a proxy for industry competition. The HHI is
measured as the sum of squares of market shares of all firms in the two-digit SIC
industry year (Bates et al., 2018). A negative relationship with cash ratio is expected.
(13) Industry cash flow risk (indrisk). The industry cash flow risk is computed as the
average variance of firm cash flows in the same industry for the sample period.The
results from previous studies such as Opler et al. (1999) and Bates et al. (2009)
suggest that greater industry volatility results in higher levels of precautionary
cash, following trade-off theory.
(14) Dividend dummy. Finally, we construct a binary variable that takes the value of 1 for
the fiscal years that a firm pays dividends payments to shareholders and
JAAR 0 otherwise. The empirical tests from Opler et al. (1999) validate the negative
correlation between dividends’ distribution and cash holdings.
3.2 The research design
3.2.1 Business strategy and the cash holdings model. The paper draws on the research of Opler
et al. (1999) and Bates et al. (2009) about the factors influencing firms’ cash holdings. We
conduct a multiple regression analysis to examine whether firms following different
strategies (prospectors and defenders) display dissimilar cash holdings’ behavior, controlling
for year and industry fixed effects. In order to measure the impact of business strategy on
liquidity, the following model is constructed:
Cashi;t ¼ β0 þ β1 Strategyi;t þ β2 CONTROLSi;t þ Industry Fixed Effects
þ Year Fixed Effects þ εi;t (1)

Where β0 is the intercept, β1 is the coefficient of strategy measure, β2 represents the control
variables’ coefficient and εit is the error term. For each firm i, cash represents cash
holdings, while strategy stands for the relevant composite score in time t. A statistically
significant and positive coefficient on the strategy index would support our primary
hypothesis.
3.2.2 Business strategy and speed of adjustment of cash holdings. Similar to the previous
studies of Orlova and Rao (2018) and Oztekin and Flannery (2012), we estimate the target
cash holdings and SOA separately, using a two-step system generalized method of
moments (GMM) estimator (Blundell and Bond, 1998). The following model describes the
dynamics of cash holdings by estimating the SOA toward an endogenously determined
target cash ratio:

cashi;t ¼ a0 þ ð1  aÞcashi;t−1 þ β1 Strategyi;t−1 þ β2 CONTROLSi;t−1

þ Industry Fixed Effects þ Year Fixed Effects þ εi;t (2)

Where Cashit is the actual cash ratio of firm i at year t and Cashit1 is the target change in
cash reserves from time t-1 to t. The coefficient (1-a) measures the SOA toward an optimal
ratio and lies between 0 and 1 to capture firm’s ability to adjust to optimal from its target
cash reserves. The deviation between the previously estimated cash and the target cash in
a period is expressed as a percentage, representing the SOA.
3.2.3 Business strategy and the firm value of the cash model. Following Dittmar and Mahrt-
Smith (2007) and Fama and French (1998), we use the valuation multiple market-to-book ratio
as dependent variable, which correlates the firm market value with accounting net worth.
More specifically, we regress the firm value on the level of cash, including control variables
that might capture other sources of value creation. The estimated model includes one-year
past and future changes in cash ratio and is specified as follows:
Mi;t ¼ β0 þ β1 Cashi;t þ β2 dCashi;t þ β3 dCashi;tþ1 þ β4 Strategyi;t þ β5 dStrategyi;t
þ β6 dStrategyi;tþ1 þ β7 CONTROLSi;t þ β8 dCONTROLSi;t−1 þ β9 dCONTROLSi;tþ1
þ Industry Fixed Effects þ Year Fixed Effects þ εit
(3)
Where Mi,t is the dependent variable, which represents the firm market value proxied as market-
to-book ratio. Cashi,t is the level of current cash holdings, dCash is the past one-year change in
firm’s cash levels and finally, leadCash is the future one-year change in firm’s cash levels .
4. Data, sample selection and descriptive statistics Business
4.1 Data and sample selection strategy and
Data are gathered from the merged Compustat/Center for Research in Security Prices (CRSP)
annual database, which covers more than 32,000 active and inactive firms in the USA from
cash policy
1970 [3]. Utilities (SIC codes 4900 and 4949) and financial firms (SIC codes 6000–6999) are
excluded from the sample, given that these industries are heavily regulated [4]. Following
standard practice, we also drop firm-year observations that report 0 and negative sales and
assets, to ensure the reliability and comparability of our findings, yielding a panel database of
254,011 firm-year observations between 1970 and 2016 [5].
Further, we use the yearly data to construct the composite strategy index, which requires
prior five-year data (Higgins et al., 2015). In order to remove extreme observations, all
variables are winsorized at 1% level both in the left and right tail of the distribution. Finally,
we exclude 109,066 observations with missing values to construct the business strategy
index, resulting in a total of 149,280 firm-year observations to run the baseline
regression (Eq.1).

4.2 Descriptive statistics

The descriptive statistics presented in panel A of Table 1 indicates that US firms in the
sample hold cash and cash equivalents equal to 16.1% of total assets with a standard
deviation of 20.4%. Focusing on the independent variables, the average leverage ratio of the
US firms is 30.2% during the years 1970–2016, suggesting that the companies mostly relied
on internal funds than debt to finance their operating or growth activities. The rate of short-
term liquid assets proxied by net working capital is minor at 2.2% of total assets, while the
average capital expenditures and acquisition activity are 6.3% and 1.5%, respectively, of
total assets. On average, the firm-level R&D intensity equals to 22.1% and firms’ market
value exceeds on average 2.3 times its book value of assets.
Panels B of Table 1 display the two-digit SIC industry composition for the full sample and
the two strategy types. Interestingly, small differences exist between firms pursuing
defenders and prospector strategies regarding their percentage participation in industry
composition. In our sample, the manufacturing sector seems to have a dominant role,
including the majority both for defenders (N 5 5,572) and prospectors (N 5 5,521). Table 1,
panel C summarizes the descriptive statistics of the six ratios used for the construction of the
strategy index. Table 1, panel D reports the statistics of the strategy variable for the full
sample.
Additionally, defenders seem to represent six percent (N 5 8,957) of the sample, while
prospectors seven percent (N 5 9,932). Notably, prospectors’ mean cash ratio is higher from
the corresponding value of the full sample. The average corporate cash holdings are
substantially lower for defenders (9.6%) than prospectors (17.3%), indicating that firms
following this strategy have a more conservative cash management policy. Table 2 provides
the results of mean and median tests in order to examine whether cash and the full set of
control variables differ for defenders and prospectors. Using prospector dummy, we perform
the test by splitting the sample in firms as those pursuing a prospector strategy and those
pursuing a defender strategy. Regarding cash holdings, proxied by cash, the hypothesis
according to which means and medians are statistically equal for the subsamples is rejected
at the 1% level for both mean and median tests (t 5 30.50 and z 5 27.90, accordingly).

5. Empirical results
5.1 Business strategy and cash holdings
Table 3 presents the results of our main analysis, considering the different corporate
strategies. In column (1), prospectors equals 1 if the firm is classified as a prospector ( strategy
JAAR Panel A: Comparative descriptive statistics
Full sample
Variable Mean Median Q1 Q3 Std dev N

cash 0.161 0.074 0.024 0.214 0.204 235,541

strategy 18.105 18.000 16.000 21.000 3.603 144,945
lev 0.302 0.230 0.061 0.411 0.354 234,909
nwc 0.022 0.081 0.046 0.240 0.496 229,122
cf 0.064 0.055 0.019 0.099 0.469 221,139
size 4.218 4.128 2.531 5.859 2.398 235,701
mtb 2.342 1.377 1.010 2.219 3.360 196,545
rnd 0.221 0.000 0.000 0.037 1.145 234,684
capex 0.063 0.039 0.014 0.081 0.077 252,504
aqca 0.015 0.000 0.000 0.000 0.050 252,504
debt 0.017 0.000 0.018 0.028 0.119 219,243
equity 0.067 0.000 0.000 0.012 0.222 214,858
loss 0.354 0.000 0.000 1.000 0.478 196,077
hhi 0.087 0.064 0.045 0.097 0.078 256,115
indrisk 0.311 0.104 0.057 0.250 0.556 242,680
divdum 0.318 0.000 0.000 1.000 0.466 233,456

Panel B: Industry composition for strategy index (company-years)

Two-digit SIC code Industry affiliation Number Percent

01–09 Agriculture and Forestry and fishing 683 0.47

10–14 Mining 8,244 5.69
15–17 Construction 2,253 1.55
20–39 Manufacturing 80,469 55.52
40–48 Transportation and communications services 6,597 4.55
50–51 Wholesale trade 7,619 5.26
52–59 Retail trade 13,331 9.20
70–89 Services 23,898 16.49
99 Other 1,851 1.28
Total 144,945 100.00

Panel C: The constituents of strategy index

Variable Mean Median Q1 Q3 Std dev

R&D5 0.230 0.000 0.000 0.034 8.801

EMPS5 0.018 0.009 0.005 0.018 0.138
REV5 22.804 0.226 0.187 1.303 1,495.638
SG&A5 0.819 0.231 0.138 0.376 14.718
σEMP5 0.981 0.142 0.035 0.574 4.204
CAP5 0.294 0.246 0.131 0.410 0.210

Panel D: Summary statistics of strategy index

Variable Mean Median Q1 Q3 Std dev

Strategy 18.107 18.000 16.000 21.000 3.613

Note(s): The table presents the mean, median, standard deviation (Std dev), 25-percentile (Q1), 75-percentile
(Q3) and the number of the observations (N) of each variable. The industry composition in panel B is based on
explicit categories of two-digit SIC codes. Table 1 also reports the summary statistics of the constituents of
Table 1. strategy index (panel C), the mean values of strategy component (panel D). Refer to Appendix 1 for variable
Descriptive statistics definitions
 Defenders Prospectors (1)–(2) Mean test Median test
Business
Variable Mean Mean Difference t p z p strategy and
cash policy
cash 0.096 0.173 0.077 30.50 0.000 27.90 0.000
strategy 11.025 24.988 13.963 810.15 0.000 120.71 0.000
lev 0.306 0.311 0.004 0.85 0.406 8.19 0.000
nwc 0.100 0.008 0.091 13.60 0.000 5.18 0.000
cf 0.063 0.121 0.183 31.20 0.000 38.03 0.000
size 4.555 4.693 0.138 4.15 0.000 5.01 0.000
mtb 1.538 2.415 0.877 20.80 0.000 21.06 0.000
rnd 0.007 0.278 0.270 21.55 0.000 61.44 0.000
capex 0.077 0.053 0.024 23.40 0.000 25.34 0.000
acqa 0.017 0.016 0.001 1.00 0.329 8.78 0.000
debt 0.013 0.015 0.002 1.10 0.268 0.99 0.321
equity 0.008 0.057 0.049 20.65 0.000 17.94 0.000
loss 0.227 0.429 0.203 28.70 0.000 28.04 0.000
hhi 0.086 0.089 0.003 2.85 0.004 0.69 0.489
Table 2.
indrisk 0.293 0.267 0.026 3.60 0.001 4.81 0.000 The univariate
divdum 0.435 0.317 0.118 16.75 0.000 16.65 0.000 analysis of the mean
Note(s): This table presents the results of a two-sample t-test with equal variances and a two-sample Wilcoxon and median for the
rank-sum (Mann–Whitney). Mean test reports the t-value and p-value and median test reports the z-value and prospectors and
the p-value. Refer to Appendix 1 for variable definitions defenders subsamples

score 24–30) and in column (2) defenders equals 1 if the firm is classified as a defender
(strategy score 6–12). Consistent with our hypotheses, the estimation of prospectors is positive
(0.0204) and significant at the 1% level. In contrast, the coefficient of defenders is negative
(0.0192). We obtain similar results if we use a 0/1 dummy, namely, prospector that equals 1 if
the firm is classified as a prospector and 0 if the firm is classified as a defender (column 3). The
positive and significant coefficient (0.0391) at the 1% level of prospector dummy confirms that
prospectors are more prone to hold higher cash levels than defenders.
As regards the control variables, the results illustrate a negative relation between cash
ratio and leverage, which is consistent with our assumption. In line with the findings of
previous authors (Opler et al., 1999), the estimation of net working capital is negative and
significant at the 1% significance level. Table 3 also shows a positive and statistically
significant relationship at the 1% level between cash flow to assets ratio and cash holdings,
confirming the findings of Opler et al. (1999). Our results indicate that, driven by the
precautionary motive, firms competing in industries with high cash flow uncertainty hold
more cash, which is consistent with previous studies such as Opler et al. (1999) and Bates et al.
(2009). In addition, we find that firm size negatively influences cash holdings. Small
companies face higher obstacles in raising debt than larger firms; large firms usually have
higher credit ratings and easier access to external financing (Opler et al., 1999). The findings
also reveal a negative effect of capital expenditures and acquisition activity on firm cash
holdings significant at the 1% level. On the other hand, the estimated coefficients of the
market-to-book ratio and R&D intensity are positive and statistically significant at the 1%
level. Net debt and net equity issuance also have a positive impact on corporate cash holdings.
Firms that hold excess cash are more likely to repurchase their shares to adjust to their
optimal cash amount (Venkiteshwaran, 2011). Consistent with our prediction, we find that the
industry competition measured by the HHI has a negative effect on cash holdings. Finally, the
analysis indicates that both loss (loss) and dividend payer dummies (dividum) are negatively
related to corporate cash holdings.
 JAAR

Table 3.

cash holdings
Business strategy and
(1) (2) (3) (4)
Full sample – Full sample – Full sample – Prospectors and defenders only –
Variables cash to total assets cash to total assets cash to total assets cash to total assets

Strategy 0.0033***(0.000)
Prospectors 0.0204***(0.004)
Defenders 0.0192***(0.003)
Prospector 0.0391***(0.005)
lev 0.2296***(0.006) 0.2327***(0.006) 0.2324***(0.006) 0.2085***(0.013)
nwc 0.1090***(0.005) 0.1100***(0.005) 0.1099***(0.005) 0.0901***(0.010)
cf 0.0562***(0.005) 0.0538***(0.005) 0.0536***(0.005) 0.0505***(0.011)
size 0.0070***(0.001) 0.0061***(0.001) 0.0061***(0.001) 0.0044***(0.001)
mtb 0.0075***(0.001) 0.0080***(0.001) 0.0080***(0.001) 0.0062***(0.001)
rnd 0.0402***(0.003) 0.0423***(0.003) 0.0430***(0.003) 0.0353***(0.005)
capex 0.3371***(0.015) 0.3552***(0.015) 0.3543***(0.015) 0.3296***(0.032)
aqca 0.3569***(0.011) 0.3616***(0.011) 0.3610***(0.011) 0.3209***(0.024)
debt 0.1594***(0.008) 0.1617***(0.008) 0.1617***(0.008) 0.1260***(0.018)
equity 0.1056***(0.008) 0.1061***(0.008) 0.1072***(0.008) 0.1046***(0.018)
loss 0.0106***(0.002) 0.0082***(0.002) 0.0081***(0.002) 0.0055(0.004)
hhi 0.1451***(0.026) 0.0202(0.018) 0.0197(0.018) 0.0215(0.036)
indrisk 0.0080***(0.002) 0.0140***(0.002) 0.0140***(0.002) 0.0220***(0.005)
divdum 0.0137***(0.002) 0.0144***(0.002) 0.0146***(0.002) 0.0212***(0.005)
Constant 0.1888***(0.020) 0.1973***(0.006) 0.1998***(0.006) 0.1618***(0.012)
Observations 108,956 108,956 108,956 13,935
Adj. R2 0.330 0.324 0.324 0.334
Year dummy Yes Yes Yes Yes
Industry dummy Yes Yes Yes Yes
Note(s): This table reports the results from ordinary least square regression models using cash to total assets as the dependent variable. In column (1) the results for full
sample are displayed, including the indicators for defender (strategy score 6–12) and prospector firms (strategy score 24–30). Column (2) shows the results of the baseline
model including a dummy variable, namely, prospector, whereas columns (3) and (4) present the results only for the subsamples of firms classified as defenders and for
firms classified as prospectors. The standard errors are reported in the parentheses. ***, **, *, indicate significance at the 1%, 5% and 10% levels, respectively. Industry
fixed effects use separate indicators for the 48 industry groups, as defined by Fama and French (1997). Refer to Appendix 1 for variable definitions
 To sum up, the estimates of the explanatory variables are consistent with the findings of Business
previous studies. More importantly, the results reported in Table 3 confirm that prospectors strategy and
are expected to pursue an aggressive cash holding policy compared to defenders. This
finding provides support on the empirical evidence of Miles and Snows’ (1978, 2003)
cash policy
background that prospectors embrace risk and therefore would hold higher cash levels to
benefit from ambiguous future investment and growth opportunities than defenders. Overall,
the results from Table 3 do not reject our first hypothesis [6].

5.2 Business strategy and speed of adjustment of cash holdings

Table 4 presents the estimation results of the adjustment model of the cash ratio to the
equilibrium level. Columns (1), (2) and (3), respectively, consider the case of the full sample,
defenders and prospectors. As reported in Table 4, most of the cash holdings’ determinants
are significant proxies of the equilibrium volume of cash. In all subsamples, the coefficient of
lag cash is positive and statistically significant, indicating that both defenders and
prospectors actively adjust their cash holdings to target levels. The empirical analysis in our
full sample produces a coefficient of 0.525. Thus, the model specification yields an average
adjustment coefficient of 0.475 (1–0.525) or 2.1 years to correction.

(1) (2) (3)

Full sample-cash/total Defenders-cash/total Prospectors-cash/total
Variable assets assets assets

L.cash 0.5253***(0.014) 0.2371***(0.055) 0.2962***(0.374)

strategy 0.0004*(0.000) 0.0017*(0.001) 0.0009(0.002)
lev 0.1047***(0.007) 0.1280***(0.020) 0.0932***(0.018)
nwc 0.1128***(0.007) 0.1339***(0.024) 0.0549***(0.014)
cf 0.0615***(0.006) 0.0123(0.023) 0.0476***(0.017)
mtb 0.0003(0.001) 0.0002(0.002) 0.0009(0.002)
size 0.0039(0.003) 0.0104(0.010) 0.0017(0.013)
rnd 0.0029(0.004) 0.0318(0.044) 0.0107**(0.005)
capex 0.4126***(0.013) 0.3019***(0.031) 0.3467***(0.057)
aqca 0.4637***(0.012) 0.3681***(0.032) 0.3702***(0.039)
debt 0.1756***(0.007) 0.1624***(0.019) 0.0926***(0.020)
equity 0.2621***(0.009) 0.2597***(0.035) 0.2019***(0.019)
loss 0.0124***(0.001) 0.0125***(0.004) 0.0072*(0.004)
hhi 0.0131(0.030) 0.0962(0.185) 0.0067(0.167)
indrisk 0.0020*(0.001) 0.0023(0.004) 0.0066(0.005)
divdum 0.0060***(0.002) 0.0085*(0.004) 0.0061(0.008)
Constant 2.4787(14.083) 4.9954(172.119) 2.2220(27.165)
Observations 108,755 6,605 7,293
No. of firms 10,967 1,778 2,196
AR2 p-value 0.4021 0.0567 0.0033
Year dummy Yes Yes Yes
Industry Yes Yes Yes
dummy
Note(s): This table reports our results from using the GMM estimation procedure of Blundell and Bond (1998).
In columns (1) and (2) the results for full sample are displayed. Columns (3) and (4) present the results only for
firms classified as defenders (strategy score 6–12) and for firms classified as prospectors (strategy score 24–30).
The standard errors are reported in the parentheses. ***, **, *, indicate significance at the 1%, 5% and 10% Table 4.
levels, respectively. Industry fixed effects use separate indicators for the 48 industry groups, as defined by Business strategy and
Fama and French (1997). Also included are the p-values for the tests of autocorrelations of 2 orders. Refer to speed of adjustment of
Appendix 1 for variable definitions cash holdings
JAAR The results converge with the theoretical framework and prior empirical literature for the
full sample and the subsamples. Specifically, we find that leverage, net working capital,
capital and acquisition expenditures and net debt and equity issuance are statistically
significant at the 1% level and negatively related to cash holdings. However, net debt and
equity issuance are statistically significant at the 1% level and positively related to cash
holdings. Defenders exhibit an SOA of 76.3%, while prospectors have an SOA of 70.3% [7].
Since prospectors retain a higher cash surplus, it seems reasonable that their cash adjustment
to target would tend to be slower relative to defenders.
Our results for the adjustment speed of cash holdings are similar to the previous findings
of Orlova and Rao (2018) and Venkiteshwaran (2011). The results from difference GMM
(while not reported) and system GMM are highly consistent with the reported empirical
results. In summary, the findings indicate that the previous year’s cash holdings are
significant and positive determinants for the current year cash level, suggesting that firms
have a target cash level. However, the sign and significance of the coefficient slightly change
along with strategy types. These results support our second hypothesis.

5.3 Business strategy and the firm value of cash

Here, we focus on the effect of business strategy on the value and usage of liquid corporate
assets. Table 5 shows that the value of a dollar of cash is less than 1 ($0.966 for the average
firm), which means that accumulating cash slightly decreases firm’s value. In the columns (2)
and (3), we split the sample by strategy type and report its influence on firm’s market value.
The results suggest that the value of cash increases when firms adopt an efficiency-oriented
strategy (defenders). Specifically, the coefficient of corporate cash holdings for defenders’
group is positive and statistically significant; an additional dollar of cash is worth $1.574, on
average. However, there is no statistically significant evidence for firms that adopt an
innovation-oriented strategy (prospectors).

6. Concluding remarks
In this paper, we investigate the influence of the firms’ strategic orientation on their cash
policy. Using the Miles and Snow (1978, 2003) strategy typology, we validate that the
business strategy index is positively associated with firms’ cash holdings. Specifically, firms
that follow the prospector strategy are more likely to accumulate cash than firms that adopt
the defender strategy. Additionally, we examine the effect of business strategy on the SOA of
cash holdings. The results point out that it takes approximately 2.1 years on average for the
nonfinancial US firm to close the gap between current and optimal cash ratio. Prospectors
seem to have a higher deviation from the target cash holdings than defenders since they are
burdened with higher transaction costs from undertaking risky R&D projects. The high SOA
of defenders’ cash reserves indicates the managerial choice for a more conservative liquidity
policy.
Furthermore, the findings validate a positive relationship between the firm market value
and corporate cash holdings. More importantly, we emphasize on the impact of strategy on
excess corporate liquidity, which is connected to a riskier and more aggressive cash
management. We find that a higher (lower) strategy index leads to a lower (higher) value of a
company’s cash holdings; however, the statistical significance of the effect of strategy comes
only from the defenders group. A possible explanation is that companies holding high levels
of cash tend to participate in high-risk activities that may lead to the shrinkage of enterprise
value, like frivolous mergers and acquisitions, a result with significant implications for
corporate managers, financial analysts and shareholders. In contrast, defenders seem to focus
on cost efficiency and organizational stability; their emphasis on financial balance and risk
 (1) (2) (3)
Business
Full sample – Defenders – Prospectors – strategy and
Variables market-to-book ratio market-to-book ratio market-to-book ratio cash policy
Cash 0.9661*** 1.5741*** 0.1040
(0.125) (0.433) (0.366)
Strategy 0.0309*** 0.0087 0.0131
(0.003) (0.026) (0.031)
Lev 0.4953*** 0.5458* 0.4010
(0.129) (0.311) (0.378)
Nwc 1.7452*** 1.4549*** 1.8794***
(0.133) (0.319) (0.337)
Cf 2.9205*** 2.3154 3.1250***
(0.205) (1.523) (0.557)
Size 0.0396*** 0.0504*** 0.0752**
(0.009) (0.018) (0.031)
Rnd 0.2598** 2.0959 0.1208
(0.105) (2.152) (0.147)
Capex 1.8220*** 2.3532*** 2.9663***
(0.288) (0.729) (1.101)
Debt 0.6354* 0.7968 0.0823
(0.330) (0.948) (1.128)
Equity 2.4571*** 0.0418 2.3516**
(0.398) (1.653) (0.919)
Aqca 2.7527*** 0.3525 3.0438***
(0.307) (0.765) (1.116)
Loss 0.8597*** 0.6303*** 0.9022***
(0.041) (0.164) (0.119)
Hhi 0.0436 0.0735 0.5141
(0.297) (0.731) (1.177)
Indrisk 0.0310 0.1083** 0.0730
(0.020) (0.050) (0.085)
Divdum 0.1582*** 0.2269*** 0.1604*
(0.029) (0.061) (0.091)
Dleadstrategy 0.0162*** 0.0170* 0.0005
(0.003) (0.010) (0.016)
Dlagstrat 0.0074** 0.0036 0.0255
(0.003) (0.010) (0.017)
Dleadlev 0.1929* 0.5043 0.2706
(0.101) (0.335) (0.343)
Dlaglev 0.1594 0.8278** 0.3968
(0.126) (0.417) (0.429)
Dleadcf 1.4182*** 1.9354*** 1.4644***
(0.100) (0.523) (0.305)
Dlagcf 0.3614*** 0.7088 0.2003
(0.113) (0.443) (0.343)
Dleadmtb 0.4533*** 0.5619*** 0.4003***
(0.011) (0.084) (0.038)
Dleadsize 0.9100*** 0.5851*** 1.0195***
(0.050) (0.199) (0.159)
Dlagsize 0.3464*** 0.2170 0.1014
(0.053) (0.268) (0.165)
Dleadrnd 0.1102* 2.6469 0.0917
(0.066) (2.506) (0.128)
Dlagrnd 0.0650 6.9598 0.0494
(0.075) (7.853) (0.103) Table 5.
Business strategy and
(continued ) the value of cash
JAAR (1) (2) (3)
Full sample – Defenders – Prospectors –
Variables market-to-book ratio market-to-book ratio market-to-book ratio

Dleadcapex 1.2157*** 0.8437** 2.2012***

(0.154) (0.387) (0.694)
Dlagcapex 0.1544 0.5951 0.6250
(0.160) (0.390) (0.836)
Dleadnwc 0.4357*** 1.0399*** 0.2143
(0.074) (0.316) (0.198)
Dlagnwc 0.5369*** 0.1798 0.5681
(0.095) (0.592) (0.352)
Dleaddebt 0.3407** 0.2900 0.5734
(0.147) (0.384) (0.482)
Dlagdebt 0.0012 0.6052* 0.2537
(0.109) (0.361) (0.382)
Dleadaqca 1.4761*** 0.9423** 0.9588*
(0.144) (0.389) (0.532)
Dlagaqca 0.4115*** 0.6854* 0.9166**
(0.122) (0.376) (0.433)
Dleadequity 1.2374*** 0.3638 1.0895***
(0.177) (0.647) (0.406)
Dlagequity 0.4581*** 0.1177 0.5871*
(0.153) (0.384) (0.343)
Dleadloss 0.3482*** 0.3487*** 0.2609***
(0.017) (0.079) (0.068)
Dlagloss 0.2362*** 0.0430 0.3827***
(0.018) (0.073) (0.063)
Dleadhhi 1.0181** 0.4494 0.7758
(0.469) (1.394) (2.724)
Dlaghhi 0.8390* 0.7227 0.8873
(0.473) (1.164) (2.550)
Dleaddivdum 0.0550*** 0.0632 0.0847
(0.020) (0.057) (0.081)
Dlagdivdum 0.0721*** 0.1544*** 0.1403**
(0.017) (0.059) (0.061)
Constant 1.0227*** 2.9364*** 1.8320**
(0.347) (0.341) (0.812)
Observations 80,050 4,830 5,107
Adj. R2 0.593 0.423 0.676
Year dummy Yes Yes Yes
Industry dummy Yes Yes Yes
Note(s): This table reports our results from using the OLS estimation for the value of cash. In columns (1) and
(2), the results for full sample are displayed. Columns (3) and (4) present the results only for firms classified as
defenders (strategy score 6–12) and for firms classified as prospectors (strategy score 24–30). The standard
errors are reported in the parentheses. ***, **, *, indicate significance at the 1%, 5% and 10% levels,
respectively. Industry fixed effects use separate indicators for the 48 industry groups, as defined by Fama and
Table 5. French (1997). Refer to Appendix 1 for variable definitions

aversion has a positive effect on the value of cash holdings and consequently on the
firm value.
Our study complements the existing literature that investigates the association between
cash holdings and firm-level characteristics. The distinctive feature of this paper is the
revelation of the impact of the competitive strategy types to the level of corporate cash. While
numerous empirical studies focus on the relationship between strategy and firm
performance, its effect on corporate liquidity is surprisingly left unexplored in the existing Business
literature. Furthermore, although several studies have analyzed the dynamics of capital strategy and
structure toward a target cash ratio, none has approached this topic considering the
perspective of business strategy in the US market setting. Finally, this paper aspires to
cash policy
contribute to a deeper understanding of the valuation process of cash reserves in the context
of strategy choice. Future research should consider the impact of corporate strategy on
corporate liquidity introducing the effect of managerial ability.

Notes
1. Only the first three are viable orientations. Since analyzers tend to exhibit traits of prospectors and
defenders, this paper focuses on the two most dominant and feasible classes of prospectors and
defenders and focuses on their different cash holding behavior.
2. In supplementary analysis, the proxy introduced by Opler et al. (1999) is also adopted, where cash
ratio is divided by net assets, where net assets are measured as total assets minus cash. Moreover, the
natural logarithm of cash to net assets ratio is also used as a dependent variable.
3. We kindly thank E. Valavani, researcher of the Maastricht University, for providing the relevant
data from Compustat Global database.
4. SIC-code stands for Standard Industrial Classification Codes (SIC), which are used to identify the
industry groups that a firm primarily operates and generates its revenue (http://siccode.com). See
Fama/French Industry classification.
5. The same requirements are used by Bates et al. (2009) for sample construction in their study.
6. We run several robustness tests (not shown for brevity). First, we estimate our baseline regression
model for the full sample using alternate measures of cash holdings and find the results to remain
qualitatively similar. Second, we re-estimate our baseline specification, splitting the sample into five
subperiods: 1970–1979, 1980–1989, 1990–1999, 2000–2009 and 2010–2016. The (untabulated) results
confirm that business strategy is positively related to cash-to-total assets ratio. Most of the control
variables have similar signs and magnitudes established from prior studies on cash holdings. Third,
assuming normality, the inclusion of the Bayesian approach shows that the results (untabulated) are
consistent to those reported in Table 3. Similar to Akbari et al. (2019), we implemented a multilevel
Bayesian test using a Metropolis–Hastings sampling method. Specifically, the first level contains the
study’s variables, while the second and the third levels contain the industry and year groupings,
accordingly. Overall, the results of the two methods do not reject the first hypothesis; there is a
positive and significant association between business strategy and corporate cash holdings. Online
appendix provides a comparison between the methods used in the study.
7. In other words, the results reveal that prospectors and defenders need 1.3 and 1.4 years to correction,
respectively.

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Venkiteshwaran, V. (2011), “Partial adjustment toward optimal cash holding levels”, Review of
Financial Economics, Vol. 20 No. 3, pp. 113-121, doi: 10.1016/j.rfe.2011.06.002.
Wu, W., Rui, O.M. and Wu, C. (2012), “Trade credit, cash holdings, and financial deepening: evidence
from a transitional economy”, Journal of Banking and Finance, Vol. 36 No. 11, pp. 2868-2883,
doi: 10.1016/j.jbankfin.2011.04.009.

Further reading
He, Z. and Wintoki, M.B. (2016), “The cost of innovation: R&D and high cash holdings in US firms”,
Journal of Corporate Finance, Vol. 41, pp. 280-303, doi: 10.1016/j.jcorpfin.2016.10.006.

Appendix 1

Variable Definition

Cash ratio (cash) Cash and cash equivalents to total assets

Leverage (lev)
Net working capital (nwc)
Cash flow (cf)
Firm size (size)
Market-to-book ratio (mtb)
R&D (rnd)
Capital expenditures (capex)
Acquisition activity (aqca)
Debt issuance (debt)
Equity issuance (equity)
Loss dummy (loss)
Total debt (short- and long-term debt) /total assets
Non-cash net working capital to assets
Cash flow divided by total assets
Natural logarithm of total assets
Book value of total assets minus book value of equity plus market value of
equity divided by book value of total assets
Ratio of research and development expenses to sales (we set xrd to 0 when
missing)
Capital expenditures/total assets (we set capx to 0 when missing)
Acquisitions to total assets
Net debt issuance relative to total assets
Net equity issuance relative to total assets
A dummy variable equal to 1 if ROE is less than 0, and 0 otherwise
Table A1.
(continued ) Variables description
JAAR Variable Definition

Herfindahl Index The Herfindahl–Hirschman Index computed using firm sales for each two-
digit SIC industry. The HHI reflects the industry’s concentration and ranges
from 0 to1, where 0 (one) indicates perfect competition ( single-monopolistic
condition)
Industry cash flow volatility The average, by two-digit SIC code, of firm standard deviation of cash flow to
(indrisk) assets for the prior five years (a minimum of three years is required to
calculate firm volatility)
Dividend payer (divdum) Dividend payer is an indicator equal to 1 if the firm paid common dividends in
the year and 0 otherwise
Net assets (na) Book value of total assets minus cash
Return on equity (roe) Ratio of income before extraordinary items over the book value of equity
dCash/assets (dcash) The cash ratio minus the lagged cash ratio
Business strategy (strategy) A discrete score with values ranging from 6 to 30 where low, middle and high
values categorize firms as defenders, analyzers and prospectors, respectively;
refer to Appendix 2 and Bentley et al. (2013) for score construction/
composition detail
Defenders A binary variable set to 1 if the strategy index ranges between 6 and 12 and
0 otherwise
Prospectors A binary variable set to 1 if the strategy index ranges between 24 and 30 and
0 otherwise
Prospector A binary variable set to 1 if a firm is classified as prospector and 0 if a firm is
classified as defender
Note(s): We detail the construction of all the variables used in the empirical analysis below. Data source is
Table A1. Compustat. Summary statistics of these variables are reported in Table 1

Variable Definition

Ratio of research and development
to sales (RD5)
Ratio of employees to sales
(EMPS5)
Change in total revenue (REV5)
Marketing to sales (SGA5)
Employee fluctuations (r(EMP5))
Table A2. σEMP5
Strategy components Capital intensity (CAP5)
description
Ratio of research and development expenditures to sales computed over
a rolling prior five-year average
Ratio of the number of employees to sales computed over a rolling prior
five-year average
One-year percentage change in total sales computed over a rolling prior
five-year average
Ratio of selling, general and administrative expenses to sales computed
over a rolling prior five-year average
Standard deviation of the total number of employees computed over a
rolling prior five-year period
Capital intensity which is measured as net ppe scaled by total assets
computed over a rolling prior five-year average

Appendix 2

Table A3 reports the sample selection procedure of this study. Table A4 depicts the correlation patterns
among the 16variables used in this study. Additionally, we perform a variance inflation factor (VIF) test
as presented in the following table. Table A5 presents the empirical results regarding strategy’s impact
on corporate liquidity for the full sample based on the alternate measurements of cash ratio. In column
(1), we use cash to total assets as the dependent variable. In column (2), we use cash to net assets as the
dependent variable. Column (3) of Table 4 re-estimates the model using the log of the ratio of cash to net
assets as the dependent variable. The relation between firms’ strategy and liquidity is significant at the
1% level. The estimated coefficient on strategy is positive, which confirms the hypothesis that Business
prospector firms hold more cash than defender firms. Across the specifications, the relation between
cash and its determinants is highly consistent with previous studies. strategy and
Table A6 tabulates the results from the estimation of Eq. (1) for the subsequent periods of the cash policy
analysis. Most importantly, we confirm that business strategy is positively related to cash-to-total assets
ratio. Most of the control variables have similar signs and magnitudes established from prior studies on
cash holdings. Following an anonymous reviewer’s comment, in Table A7, we fit Bayesian linear
regression in the baseline model by simply using -bayes: regress y x1 x2-. The results between linear and
Bayesian linear regression are similar because the default priors the Bayes prefix used, as described in
the model summary, are normal with mean 0 and variance of 10,000 for the regression coefficients.
However, the interpretations are different. In Bayesian models, we assume that all parameters are
random; thus, a 95% credible interval of [0.0030, 0.0035] for the slope coefficient on strategy index
{cash:strategy} implies that the probability that {cash:strategy} is between 0.0030 and 0.0035 is 0.95.
Also, for each parameter, regress produced just one estimate, whereas Bayes’s regress produced 10,000
Monte Carlo Standard Error (MCSE) estimates. MCSE estimates are simulated from a posterior
distribution of model parameters, after discarding the first 2,500 estimates for the burn-in period. What
is reported in the output are the summaries of the marginal posterior distributions of the parameters
such as posterior means and posterior standard deviations. Finally, Table A8 compares the regression
results regarding the effect of business strategy on cash holdings.

Firm-year
Description and criteria observations

Panel A: strategy score

Compustat data for (fiscal) years between 1970 and 2016 (zero negative sales and 387,695
assets excluded)
Less non-US Firms incorporated in the USA (27,267)
Less utilities and financial industries (SIC codes: 49, 60–69) (133,684)
Compustat data available for the calculation of the strategy variable and the inputs for 254,011
the expectation models
Less firms without five years of prior data to construct the strategy score and firms (109,066)
with missing values for all six strategy’s component variables per firm-year
Total Observations for strategy score 144,945
Panel B: variables for the expectation models
Compustat data available for the models in panel A 254,011
Less missing data and control variables in the model (104,731)
Total observation for the expectation models 149,280
Panel C: strategy and cash holdings controls model sample
Strategy composite score data set in panel A 144,945
Less observations not matched after merging panel A with panel B (35,989)
Total observations for strategy data set 108,956
Panel D: strategy and cash holdings SOA model sample
Strategy composite score data set in panel A 144,945
Less missing data and control variables in the SOA model (36,190)
Total observations for the strategy SOA data set 108,755
Panel E: strategy and cash holdings firm value model sample
Strategy composite score data set in panel A 144,945
Less missing data and control variables in firm value model (64,895) Table A3.
Total observations for strategy firm value data set 80,050 Sample selection
 JAAR

Table A4.

factor (VIF) values

and variance inflation
The correlation matrix
V1 V2 V3 V4 V5 V6 V7 V8 V9 V10 V11 V12 V13 V14 V15 V16

V1: cash 1.000

V2: strategy 0.110 1.000
V3: lev 0.257 0.028 1.000
V4: nwc 0.119 0.064 0.581 1.000
V5: cf 0.117 0.143 0.449 0.650 1.000
V6: size 0.137 0.029 0.096 0.171 0.350 1.000
V7: mtb 0.210 0.103 0.329 0.569 0.615 0.217 1.000
V8: rnd 0.217 0.124 0.047 0.157 0.319 0.099 0.249 1.000
V9: capex 0.155 0.086 0.039 0.052 0.067 0.045 0.003 0.031 1.000
V10: aqca 0.076 0.004 0.037 0.000 0.050 0.154 0.016 0.014 0.076 1.000
V11: debt 0.026 0.011 0.216 0.075 0.142 0.026 0.104 0.060 0.178 0.298 1.000
V12: equity 0.178 0.098 0.085 0.228 0.452 0.240 0.391 0.279 0.043 0.019 0.018 1.000
V13: loss 0.059 0.107 0.243 0.277 0.380 0.267 0.138 0.138 0.089 0.051 0.024 0.224 1.000
V14: hhi 0.018 0.010 0.007 0.023 0.025 0.021 0.025 0.002 0.004 0.002 0.005 0.010 0.022 1.000
V15: indrisk 0.207 0.016 0.009 0.179 0.125 0.042 0.146 0.088 0.093 0.068 0.022 0.056 0.117 0.013 1.000
V16: divdum 0.155 0.057 0.136 0.178 0.179 0.378 0.129 0.092 0.066 0.006 0.022 0.168 0.367 0.007 0.160 1.000
VIF 1.06 1.68 2.48 2.89 1.40 1.9 1.17 1.13 1.18 1.27 1.44 1.38 1.00 1.12 1.35
Note(s): The table presents the correlation matrix and VIF values for the main variables used in the analysis. Refer to Appendix 1 for variable definitions
 (1) (2) (3)
Business
Variables Cash to total assets Cash to net assets Log cash to net assets strategy and
cash policy
strategy 0.0033*** 0.0107*** 0.0397***
(0.000) (0.001) (0.003)
lev 0.2296*** 0.5862*** 2.3990***
(0.006) (0.025) (0.064)
nwc 0.1090*** 0.3242*** 1.1159***
(0.005) (0.025) (0.049)
cf 0.0562*** 0.1761*** 0.4761***
(0.005) (0.025) (0.044)
size 0.0070*** 0.0230*** 0.0515***
(0.001) (0.003) (0.006)
mtb 0.0075*** 0.0098*** 0.0833***
(0.001) (0.003) (0.006)
rnd 0.0402*** 0.2552*** 0.2303***
(0.003) (0.023) (0.025)
capex 0.3371*** 1.2678*** 2.6180***
(0.015) (0.082) (0.146)
aqca 0.3569*** 1.0738*** 2.9708***
(0.011) (0.045) (0.114)
debt 0.1594*** 0.4833*** 1.2624***
(0.008) (0.033) (0.071)
equity 0.1056*** 0.5084*** 0.6126***
(0.008) (0.049) (0.062)
loss 0.0106*** 0.0056 0.1573***
(0.002) (0.007) (0.016)
hhi 0.1451*** 0.3162*** 1.6403***
(0.026) (0.099) (0.257)
indrisk 0.0080*** 0.0359*** 0.0295*
(0.002) (0.008) (0.016)
divdum 0.0137*** 0.0318*** 0.1065***
(0.002) (0.007) (0.024)
Constant 0.1888*** 0.4093*** 2.0187***
(0.020) (0.065) (0.231)
Observations 108,956 108,941 108,134
Adj. R2 0.330 0.200 0.290
Year dummy Yes Yes Yes
Industry dummy Yes Yes Yes
Note(s): This table reports the results from ordinary least square regression models using alternate definitions
of cash ratio for the full sample. Columns (1), (2) and (3) use cash/total assets, cash/net assets and the natural
logarithm of cash/net assets as dependent variables, respectively. The standard errors are reported in the Table A5.
parentheses. ***, **, *, indicate significance at the 1%, 5% and 10% percent levels, respectively. Industry fixed Baseline regressions:
effects use separate indicators for the 48 industry groups, as defined by Fama and French (1997). Refer to alternate cash holding
Appendix 1 for variable definitions measures
JAAR (1) (2) (3) (4) (5)
1970–1979 1980–1989 1990–1999 2000–2009 2010–2016
Cash to total Cash to total Cash to total Cash to total Cash to total
assets assets assets assets assets
Variables B

strategy 0.0017*** 0.0019*** 0.0034*** 0.0068*** 0.0051***

(0.000) (0.000) (0.000) (0.001) (0.001)
lev 0.2199*** 0.2443*** 0.2411*** 0.2112*** 0.1770***
(0.010) (0.010) (0.011) (0.009) (0.014)
nwc 0.2189*** 0.1473*** 0.1132*** 0.0802*** 0.0574***
(0.014) (0.011) (0.009) (0.007) (0.011)
cf 0.1293*** 0.0367*** 0.0459*** 0.0587*** 0.0578***
(0.022) (0.012) (0.010) (0.007) (0.011)
size 0.0079*** 0.0092*** 0.0068*** 0.0066*** 0.0083***
(0.001) (0.001) (0.001) (0.001) (0.002)
mtb 0.0091*** 0.0042*** 0.0060*** 0.0094*** 0.0107***
(0.003) (0.002) (0.001) (0.001) (0.002)
rnd 0.0458 0.0363*** 0.0542*** 0.0287*** 0.0358***
(0.043) (0.010) (0.005) (0.005) (0.006)
capex 0.3821*** 0.3405*** 0.3218*** 0.3521*** 0.3367***
(0.022) (0.021) (0.025) (0.032) (0.044)
aqca 0.2447*** 0.2578*** 0.3255*** 0.4261*** 0.4734***
(0.028) (0.019) (0.018) (0.019) (0.027)
debt 0.1778*** 0.1784*** 0.1497*** 0.1420*** 0.1849***
(0.016) (0.012) (0.014) (0.014) (0.023)
equity 0.1198*** 0.0924*** 0.1171*** 0.0783*** 0.1401***
(0.033) (0.015) (0.014) (0.013) (0.021)
loss 0.0069** 0.0309*** 0.0170*** 0.0014 0.0092*
(0.003) (0.003) (0.003) (0.003) (0.005)
hhi 0.0027 0.0358 0.0990 0.0177 0.0278
(0.076) (0.060) (0.069) (0.081) (0.081)
indrisk 0.0092 0.0026 0.0046 0.0038** 0.0033
(0.087) (0.003) (0.005) (0.002) (0.003)
divdum 0.0070*** 0.0061* 0.0174*** 0.0267*** 0.0176***
(0.003) (0.003) (0.004) (0.004) (0.005)
Constant 0.1724*** 0.2291*** 0.2581*** 0.0491 0.1084**
(0.028) (0.033) (0.041) (0.032) (0.050)
Observations 15,176 25,579 27,876 26,053 14,272
Adj. R2 0.331 0.272 0.325 0.332 0.345
Year dummy Yes Yes Yes Yes Yes
Industry Yes Yes Yes Yes Yes
dummy
Table A6. Note(s): This table reports the results from ordinary least square regression models using cash to total assets
Business strategy and as the dependent variable. The standard errors are reported in the parentheses. ***, **, *, indicate significance
cash holdings in the at the 1%, 5% and 10% levels, respectively. Industry fixed effects use separate indicators for the 48 industry
subsample periods groups, as defined by Fama and French (1997). Refer to Appendix 1 for variable definitions
Variables Coefficient SD MCSE Median l-95% CI u-95% CI
Business
strategy and
strategy 0.0033 0.0001 0.0000 0.0033 0.0030 0.0035 cash policy
lev 0.2304 0.0012 0.0004 0.2304 0.2325 0.2281
nwc 0.1098 0.0011 0.0003 0.1095 0.1121 0.1080
cf 0.0558 0.0009 0.0003 0.0558 0.0537 0.0575
size 0.0069 0.0002 0.0000 0.0069 0.0073 0.0065
mtb 0.0076 0.0002 0.0000 0.0076 0.0072 0.0080
rnd 0.0401 0.0009 0.0002 0.0403 0.0381 0.0415
capex 0.3366 0.0011 0.0003 0.3365 0.3388 0.3348
aqca 0.3547 0.0014 0.0004 0.3550 0.3567 0.3525
debt 0.1607 0.0012 0.0003 0.1605 0.1588 0.1628
equity 0.1045 0.0015 0.0004 0.1044 0.1023 0.1078
loss 0.0101 0.0008 0.0002 0.0100 0.0115 0.0081
hhi 0.1435 0.0009 0.0002 0.1433 0.1451 0.1420
indrisk 0.0077 0.0009 0.0002 0.0077 0.0061 0.0095
divdum 0.0139 0.0008 0.0002 0.0140 0.0153 0.0123
Note(s): The Table reports the results from a three-level Bayesian linear regression (Random-walk Table A7.
Metropolis–Hastings sampling). MCSE iterations 5 12,500, MCSE sample size 5 10,000, Number of Bayesian linear
observations 5 108,956. Acceptance rate 5 0.2612, efficiency: min 5 0.0011, avg 5 0.0051, max 5 0.2293 regression results

Panel A. Comparison in the five periods (linear regression method)

Subsample Hypothesis Direction Results

1970–1979 H1 Positive Not rejected
1980–1989 H1 Positive Not rejected
1990–1999 H1 Positive Not rejected
2000–2009 H1 Positive Not rejected
2010–2016 H1 Positive Not rejected
Table A8.
Compression of the
Panel B. Comparison in the two methods regression results
regarding the effect of
Subsample Hypothesis Direction Results business strategy on
Linear regression model H1 Positive Not rejected cash holdings
Bayesian model H1 Positive Not rejected (baseline model)

Corresponding author
Dimitris Tzelepis can be contacted at: tzelepis@upatras.gr

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