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Partial adjustment toward optimal cash holding levels

  • Venkiteshwaran, Vinod

Recognizing that industry and capital market conditions may impede a firm's desire to achieve its targeted cash holding levels, we estimate a dynamic model that allows firms to adjust their cash holding levels over time and find evidence consistent with a trade-off type behavior in cash holding levels. We estimate a partial adjustment model and find that firms rapidly correct any deviation from their targeted cash levels. A typical firm in our sample closes this gap within two years. Inconsistent with the agency view of excess cash holdings, we find that cash holding levels for firms with excess cash persists over time compared to those that have a deficit. We also find that smaller firms typically hold excess cash and are quicker to correct deviations than large firms consistent with the view that it is more costly for financially constrained firms to operate at sub-optimal levels of liquid assets.

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Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 20 (2011)
Issue (Month): 3 (August)
Pages: 113-121

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Handle: RePEc:eee:revfin:v:20:y:2011:i:3:p:113-121
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620170

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