Strategic deviance and cash holdings
Our researchers
Overview
Why do some companies hold unusually large amounts of cash? This research investigates how strategic deviance, when firms deliberately adopt strategies different from their industry peers, affects corporate cash policies. Using data from U.S. firms between 1992 and 2016, the study finds that strategically deviant firms consistently retain more cash than their peers. While one might assume these reserves are for precautionary purposes, the evidence points instead to managerial discretion. Shareholder value falls as firms deviate more strongly from industry norms, and the effect is stronger in firms with weaker governance. We also find that these firms are less likely to pay dividends and more likely to avoid taxes, both of which contribute to higher cash levels. These results provide insights for investors, policymakers, and boards into the risks of excessive cash holdings and highlight the governance challenges of firms pursuing unconventional strategies.
Takeaways for policymakers, managers, and investors
- Firms with unconventional strategies are more likely to accumulate excess cash, which can reduce shareholder value.
- Stronger governance is needed to ensure managers do not hoard cash for their own benefit.
- Dividend and tax behaviors can serve as signals of opportunistic cash retention in such firms.
Implications for research
- Highlights how corporate strategy shapes financial policies beyond traditional finance and governance factors.
- Identifies strategic deviance as a new determinant of cash holdings and their valuation.
- Extends the literature on strategic deviance by linking it to corporate cash policies and agency problems.
Want to know more?
Dong, X., Chan, K.C., Cui, Y., & Guan, J.X. (2021). Strategic deviance and cash holdings. Journal of Business Finance & Accounting, 48(3-4), 742–782.