How Hoarding Cash Affects Firms

A STUDY OF OVER 1,700 ITALIAN COMPANIES INVESTIGATES THE RELATIONSHIP BETWEEN LIQUIDITY AND CORPORATE VALUE. IT IS POSITIVE FOR FAMILY COMPANIES, PARTICULARLY IF EXECUTIVES COME FROM THE FAMILY

by Domenico Rocco Cambrea, Bocconi Department of Management and Technology
Translated by Alex Foti


In recent years, the relationship between liquidity and business performance has attracted interest in the financial press, as well as in academic and managerial circles.

The cash balances of the first hundred Italian family companies amount to €40 billion. By way of example, last year FCA announced it had repaid all its industrial debt thanks to the existence of liquid assets amounting to €456 million. Even in the US there is a similar trend: for example, electric car-maker Tesla hoarded about $793 million in cash at the end of 2018.

In light of the current processes of business internationalization, financial integration and intense competition in global markets, companies consider the holding of abundant cash reserves a major tool for financial flexibility, in order to be immediately reactive so as not to lose any growth opportunity and quickly remedy business errors that could bring instability.

However, these conditions vary depending on whether the company is a family business or not. In fact, family companies, due to the many interests to be protected mirroring differing expectations of the various family members, are more complex to manage. This determines the establishment of objectives that are different with respect to non-family businesses, which could opt to hold large liquidity reserves for other purposes, not necessarily aimed at developing the company. Holding large quantities of cash could give rise to opportunistic and personalistic management behavior, which could cause problems within the company and conflicts with shareholders that translate into agency costs, reducing the value of the company.

Given the importance of the topic and the presence of conflicting results in the literature, it is particularly interesting to investigate the impact of liquidity on the performance of Italian companies. They operate in a context where the supply of financial resources is mostly provided by banks rather than financial markets, and where, as a result, hoarding cash can be the right strategy for the growth and development of a business.

An empirical analysis, conducted on a sample of 1,739 Italian companies listed on the stock exchange, with reference to the 2003-2015 period, shows how the increase in liquidity generates an increase in the business value only in family-controlled companies. In particular, the analysis shows that the huge liquidity reserves appear to be advantageous only for family businesses and in particular for companies whose managers belong to the family as a reference shareholder. The management of company resources - and therefore directly of company liquidity - by family members is therefore strongly linked to corporate reputation, with positive effects on company value.

The CEO / Family President takes on a central role in maintaining an efficient governance system, aimed at a productive use of the company's resources, as well as at developing virtuous value creation processes. Management's belonging to the family unit is an added value and determines a prudent management of liquidity, which is appropriately invested not in an opportunistic way, but only for the purpose of business growth.