Corporate cash holdings and future market share growth

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School of Business | Master's thesis
Degree programme
60 + 3
Previous literature has demonstrated that high cash holdings can serve multiple purposes, including facilitating aggressive expansion, acting as a defensive mechanism, and smoothing R&D expenditures. However, it is still not self-evident how managers and shareholders should view the increasing cash balances. In this paper, we examine whether high cash holdings are positively related to the future industry-related market share growth i.e., can companies convert their strong cash position to above industry-average growth. Furthermore, we examine how exceptional macroeconomic circumstances, particularly crises periods, affect this relation. We use European-based data from 2000 to 2022, constructed from publicly listed manufacturing companies with SIC codes between 2000 and 3999. As our methodology, we use an instrumental variable approach which is based on the work of Fresard (2010). Additionally, we employ a fixed effects regression model with several control variables to isolate the effect of cash holdings. Our results show that firms with high cash holdings experience stronger industry-related market share growth compared to their cash-poor rivals. However, we do not find strong evidence that the positive effect of having excess cash is heightened during economic downturn periods or crisis times. Overall, the paper contributes to the existing literature by showing that cash holdings have been throughout the 21st century positively associated with industry-related market share growth and thus one source of competitive edge.
Thesis advisor
Kaustia, Markku
cash holdings, market share, growth, manufacturing industries, liquidity
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