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Corporate Cash Savings: Precaution versus Liquidity

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Author Info

  • Martin Boileau
  • Nathalie Moyen

Abstract

Cash holdings as a proportion of total assets of U.S. corporations have roughly doubled between 1971 and 2006. Prior research attributes the large cash increase to a rise in firms’ idiosyncratic risk. We investigate two mechanisms by which increased idiosyncratic risk can lead to higher cash holdings. The first is linked to the precautionary motive inducing firms to be prudent about their future prospects. The second mechanism is linked to the liquidity motive requiring firms to meet their current liquidity needs. We find that the mechanism embedded in the liquidity motive best explains how the increased idiosyncratic risk nearly doubled cash holdings. As for the precautionary motive, its importance has decreased over time to the point generating very little precautionary savings.

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Bibliographic Info

Paper provided by CIRPEE in its series Cahiers de recherche with number 0953.

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Date of creation: 2009
Date of revision:
Handle: RePEc:lvl:lacicr:0953

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Keywords: Dynamic Capital Structure; cash holdings; precautionary savings; corporate liquidity;

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Cited by:
  1. Auray, Stephane & de Blas, Beatriz, 2011. "Investment, Matching and Persistence in a modified Cash-in-Advance Economy," Working Papers in Economic Theory 2011/10, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).

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