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Strategic interactions and the sensitivity of cash savings to stock price

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  • Zhang, Rongrong

Abstract

We examine how strategic interactions, i.e., strategic substitutes (SS) and strategic complements (SC), affect the sensitivity of cash savings to stock price. Using a panel data of U.S. firms over the 1997–2019 period, we show that cash savings are more sensitive to stock price among SS than SC and the intensity of rivals’ interactions in product market increases this sensitivity. These results are consistent with research showing that SS are more responsive to product market competition. We further show that R&D intensities and corporate hedging needs act as two channels through which strategic interactions affects cash holdings. First, R&D intensities increase the sensitivity of cash to stock price. This effect is more pronounced among SS, complementing researching showing stock market reacts more strongly to innovation by SS. Second, we report that hedging needs decrease the sensitivity of cash savings to stock price, especially for SC, consistent with the notion that using differentiated inputs increases hedging costs, hence, SC are more conservative in their liquidity management.

Suggested Citation

  • Zhang, Rongrong, 2024. "Strategic interactions and the sensitivity of cash savings to stock price," The Quarterly Review of Economics and Finance, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:quaeco:v:97:y:2024:i:c:s1062976924000735
    DOI: 10.1016/j.qref.2024.101867
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    More about this item

    Keywords

    Strategic complements; Strategic substitutes; Cash savings; Stock price informativeness;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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