Is Cash King?Article

Nason, Robert S. and Pankaj C. Patel. (2016). “Is cash king? Market performance and cash during a recession.” Journal of Business Research. 69(10), 4242-4248.


Dr. Michael Gunderson, Director and Professor


Previous research suggests that “cash is king.” Market performance of publicly traded companies (measured by Tobin’s Q) rises with increases in cash (as a percentage of total assets). Market performance starts to dip if firms hold more than 90 percent of assets in cash. The authors of this study investigated if this was equally true during times of recession. It wasn’t.

What this means for food and agribusinesses

In the economic downturn of the agriculture industry, it might be surprising to learn that it could be time to start spending that cash hoard. This is true for at least three reasons: well-managed firms should have plenty of cash to act as a buffer against lean times, the recession has likely depressed asset prices, and interest rates are rising.

In the article, the authors found that the market rewards firms with very low cash holdings (less than 40 percent of total assets) for growing cash holdings during the recession. The market is sending a signal that low cash holding firms need to rebuild the cash buffer before considering additional growth opportunities. The challenge, of course, is that growing cash will be a challenge during the recession. Profits are likely to be depressed, limiting growth from retained earnings. Lenders are likely to limit any additional borrowing. The firms that prepared poorly for the recession will have to make tough decisions to grow cash reserves. One option might be to sell off less profitable assets. Cost cutting is likely a priority in these firms.

On the other side, firms that prepared well for the recession by building cash reserves receive strong market signals to start spending that cash. Firms with adequate cash holdings (more than 40 percent of total assets in cash) improve their market performance by spending some of that cash. Recall, when the economy is growing, firms’ market performance improves with cash holdings all the way to 90 percent of assets. A recession might force firms to call on that buffer to cover costs and work with customers to weather the storm.

This dynamic—firms with low cash divesting assets and firms with cash to spend—creates an opportunity to buy assets at discounted prices. As the agricultural economy undergoes its own recession, the opportunity for well-managed operations is obvious. Those that built adequate working capital reserves will now have opportunities to buy land at prices off from their astronomical highs. Well-managed firms are likely to have equipment sufficient to operate additional land.

The same is true for the agribusiness input supply industries. There will be opportunities for financially well-positioned firms to acquire assets, invest in marketing programs, and create additional value for customers. The extent to which food processors and those further down the value chain are enjoying the benefits of lower commodity prices, executives in those firms would be wise to grow cash reserves.

The authors of the research do not consider interest rates, but rates are worthy of consideration now. It is likely the Federal Reserve will raise interest rates slowly and steadily for the future. If this is the case, the opportunity cost of holding cash will also rise. Firms that are looking to acquire asset at depressed prices might be wise to do so with a little borrowing now before interest rates continue on their march upward.

Dr. Mike Boehlje would be disappointed if I failed to mention that while “cash is king,” profitability is the kingdom. Cash can help buffer difficult times, but ultimately the buffer runs out with too many periods of difficulty. It is profitability that allows firms to grow cash balances to position for downturns and growth opportunities.