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A transaction cost perspective on why, how, and when cash impacts firm performance

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  • Jonathan P. O'Brien

    (Lally School of Management and Technology, Rensselaer Polytechnic Institute, Troy, NY, USA)

  • Timothy B. Folta

Abstract

While both financial and behavioral theories suggest that cash holdings may be beneficial to R&D-intensive firms, agency theory would suggest that strong monitoring may be needed to ensure that cash holdings are not squandered. We contend that transaction cost economics provides a valuable lens for understanding the performance implications of cash holdings because not only does it explicate the benefits and costs of cash holdings in a single unified theoretical framework, but it further clarifies how environmental uncertainty critically moderates these relationships. Empirical tests on a large sample of US corporations yield strong support for our theory. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Jonathan P. O'Brien & Timothy B. Folta, 2009. "A transaction cost perspective on why, how, and when cash impacts firm performance," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(7), pages 465-479.
    • Handle: RePEc:wly:mgtdec:v:30:y:2009:i:7:p:465-479
    DOI: 10.1002/mde.1457
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