Why Do Firms Hold Cash? Evidence from Demographic Demand Shifts

Igor Cunha · Joshua Matthew Pollet

74 citations0/0 files storedReview of Financial Studies

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Corporate Finance and Governance Financial Markets and Investment Strategies Working Capital and Financial Performance

Abstract

Abstract We exploit variation in demand induced by demographics to provide causal evidence of the precautionary motive of cash holdings. We show that firms significantly increase their cash levels in response to exogenous increases in investment opportunities. We also provide novel evidence of the dynamics of accumulation and use of cash. Financially constrained firms build their cash reserves using internal sources. Consequently, they start saving earlier and keep high cash levels longer. Unconstrained firms rely on external financing to both invest and build cash reserves, requiring them to save less and allowing them to incur lower costs of carry. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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References

1986Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers 1958The Cost of Capital, Corporation Finance and the Theory of Investment 2010New Evidence on Measuring Financial Constraints: Moving Beyond the KZ Index 1999The determinants and implications of corporate cash holdings 2006Financial Constraints Risk 2004The Cash Flow Sensitivity of Cash 1993Risk Management: Coordinating Corporate Investment and Financing Policies 2009Why Do U.S. Firms Hold So Much More Cash than They Used To?

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