research@hec - Issue #11 - (Page III)

Financial research has traditionally shown little interest in cash holdings, which have generally been perceived as merely negative debt. However, since the late 1990s, various studies have shown that large companies often have very large stocks of cash. They represent an average of 15% to 20% of total assets; prior to the crisis, this figure was as high as 25% to 30% in the United States. In fact, cash holdings have increased considerably since the 1970s, when they rarely represented more than 10% of total assets. More recently, the economic crisis and ensuing capital shortages have revived interest in the issue of cash. What advantages do large reserves offer companies? Laurent Fresard offers a novel response to this question and shows that “in highly competitive environments, cash is a bona fide strategic tool.” Cash Reserves: Key Ideas its future market share and stock value growth. strategic advantages. M A NEW WAY OF SEEING CASH RESERVES For a long time, abnormally large stocks of cash were considered dangerous. People were afraid that they offered business leaders too much room for maneuver, to the potential detriment of shareholders. If corporate governance was inadequate, cash could indeed be used to finance projects that benefited the former far more than the latter. That said, Laurent Fresard says, large cash reserves • There is a positive correlation between a company’s cash reserves and • Cash provides not only a safety net for times of crisis, but also long-term Both Safety and Strategy! A STASH OF CASH: MUCH MORE THAN A SAFETY NET But is cash just a “safety net” for tough times? Fresard says it is more than that, explaining that it also plays an important role in long term business performance. He points to two “cash effects.” • A company that has a large reserve of cash has more strategic flexibility than one that does not. In a highly competitive environment, this enables the firm to lower prices, enhance customer service, hire good employees, or improve its distribution networks. Such short term “sacrifices” help build a strong position on the product market and thus foster good long term performance. • In addition, cash can have a dissuasive effect on competitors, because companies’ strategies are often influenced by their competitors’ cash holdings. “A company’s decision on whether or not to enter a new market or launch a new product is undeniably influenced by the potency of potential competitors.” constitute a strategic advantage rather than a risk. “Especially during a crisis,” he adds. “Companies that have large cash reserves do better than their competitors because they do not need to go through capital markets to obtain financing. Cisco proved this during the 1997 Asian financial crisis.” Laurent Frésard BIOGRAPHY Laurent Fresard has been an assistant professor in the HEC Paris Department of Finance since 2008. He earned his PhD from the University of Neuchâtel in 2009. His research interests include corporate finance (cash policy, financial flexibility, and strategic interactions with product markets) and international finance (cross-listings, cross boards, and international corporate governance). In August 2008, Fresard received the Chicago Quantitative Alliance (CQA) award for the best paper presented at the European Finance Association Meeting in Athens. October-November 2009 • research@hec III http://www.hec.edu/Faculty/Professors-alphabetical-list/(professor)/Fresard

Table of Contents for the Digital Edition of research@hec - Issue #11

Cover & Contents
Should Business Schools Conduct Research on Innovation?
Cash Reserves: Both Safety and Strategy!
A Grain of Sand: Often a Pearl, Sometimes Poison
Increasing the Effectiveness of Online Advertising

research@hec - Issue #11