Is cash king or dead money? : an empirical study of Norwegian firms and the effect of cash on firm performance

Abstract

This thesis explores the relationship between cash and rm performance. Additionally, the thesis provides insight into how this relationship varies across di erent time periods and industries. Using instrumental variable multiple regression analysis, the thesis analyzes accounting data for a sample of Norwegian rms from 2005-2015. After correcting for a non-linear relationship between cash and rm performance we nd that i) rm performance for our sample of Norwegian rms is less a ected by cash than US manufacturing rms, ii) cash has a positive, but weakly diminishing e ect on rm performance throughout the entire sample period, iii) the relationship between cash and rm performance is most pronounced pre-recession, iv) rms with high knowledge intensity have higher cash ratios than rms with lower knowledge intensity, v) cash has less e ect on rm performance for rms with high knowledge intensity compared to rms with low knowledge intensity for cash ratios up to 0.4, and vi) cash has a greater e ect on rm performance for rms in labor intensive industries than in capital intensive industries. In addition to our analysis results, we provide a thorough discussion of potential pitfalls of OLS regression and how we account for these. We also attempt to explain all our results in great detail, focusing on understanding the underlying causality behind the regression estimates. We conclude that cash indeed has a substantial impact on rm performance and that the importance of cash is understated in much of the current strategy and nance theory.