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Cash holdings and risk-adjusted returns: The role of business strategy, life cycle, and managerial ability
Journal article   Peer reviewed

Cash holdings and risk-adjusted returns: The role of business strategy, life cycle, and managerial ability

Dominic Gasbarro, Hong Miao, Robert G. Schwebach and J. Kenton Zumwalt
International review of financial analysis, Vol.105, 104376
2025

Abstract

Business strategy Cash holding Deciles Industry effect Life cycle Managerial ability Return
This study explores the factors influencing firms’ cash holdings and their impact on shareholder returns. Firms are grouped into deciles based on Median Industry-Adjusted Cash Ratios (MACR). We examine the influence of market risk measures, operational and financial ratios, macroeconomic conditions, and key variables: business strategy, life cycle stage, and managerial ability. Our findings show that incorporating MACR with these variables improves the understanding of firm returns. ‘Prospector’ firms with high MACRs deliver strong excess returns, while ‘analyzer’ firms also outperform. Growth-phase firms with high MACRs show significant excess returns, while maturity-phase firms consistently perform well regardless of MACR. Managers with high ability generate excess returns at all MACR levels. Additionally, value-weighted portfolios outperform equally-weighted ones.

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