Unlocking the Power of Cash Reserves: How Managerial Ability Shapes Firm Performance

Growing literature on cash holding and managerial ability provides the idea of studying these two concepts in the context of the same model. The effect of cash holding on firm performance is established in this study, which also looked at the moderating effect of managerial ability on the direct relationship between cash holding and firm performance—analyzing 2,858 Chinese non-financial firms, we employ OLS, fixed effect, and robust standard error regression to test the formulated hypotheses. We employ several additional tests to confirm the robustness of our findings. This study offers compelling evidence that managerial ability significantly impacts the relationship between cash holding and firm performance. We show that cash holdings boost the operating performance of firms with exceptional managers. Therefore, managerial expertise is essential when considering the cash and performance relationship. Prior studies focus on the direct relationship between cash holdings and firm performance. However, managerial ability, which is a crucial factor and an effect that affects this relationship, is overlooked. This study shows that firms with highly able managers boost their performance by holding more cash. Plain language summary Impact of cash holdings on firm performance with the moderating role of managerial ability In this study, we delve into the intertwined dynamics of cash reserves and managerial ability within firms. We explore how these factors jointly influence firm performance, using data from 2,858 Chinese non-financial firms. Employing various regression techniques and additional tests, we unveil a significant finding: managerial skill significantly moderates the impact of cash reserves on firm performance. Specifically, we find that firms with adept managers experience enhanced operating performance when holding greater cash reserves. This underscores the critical role of managerial expertise in optimizing the cash-performance relationship. Our study fills a gap in existing literature by highlighting the often overlooked influence of managerial ability in shaping firm outcomes. By shedding light on this relationship, we contribute valuable insights for firms seeking to leverage their cash holdings effectively to drive performance under capable leadership.