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.