Operating Performance of Japanese Firms with Large Cash Holdings during the Bubble Economy

Abstract

The existing literature posits that large corporate cash holdings might induce agency problems and thus hinder firms' operating performance. This paper investigates how Japanese firms maintain high/low cash holding position during the late 1980s and early 1990s. I find that firms pile cash because there is no profitable project. On the other hand, firms maintain a low cash holding position due to over-investing. I also find that excess cash holdings significantly affect firms' operating performance. Lastly, I find no direct evidences that ownership structure affect firms operating performance.