The Impact of Cash Holdings on Corporate Performance during the COVID-19 Pandemic

Abstract

This study investigates the effect of cash holdings on firm performance during the unprecedented challenges and disruptions caused by the Coronavirus disease (COVID-19) pandemic, which profoundly affected global economies and businesses. The study takes into account diverse government policies implemented in response to the pandemic. It also includes a comparison of how cash holdings affect firm performance between emerging and developed markets and additionally examines the impact of cash holdings across various industries. We hypothesize that firms with greater pre-pandemic cash reserves are more likely to maintain stronger performance during the pandemic. Our analysis includes quarterly data from 39,838 firms across 86 countries, covering the period from 2015 to 2022. Our results confirm the precautionary motive theory of cash reserves: cash holdings mitigate the pandemic's negative impact on firms across various sectors and markets, irrespective of the severity of government policies adopted. Firms with sufficient cash reserves exhibit higher returns on equity, returns on assets, and Tobin’s Q. This research provides insights into factors that enhance firms' performance during crises like COVID-19, underscores the importance of cash reserves, and offers insights for navigating future challenges.