Cash Reserve and Venture Business Survival Probability
Both solid business ventures and those not on as firm a footing can fail because they do not manage risk properly. This study shows that start-ups with a positive NPV project can fail because of inadequate cash reserves. We apply the first-hitting time model to analyze the effect of a cash reserve on the business failure density function and the cumulative failure probability for a specific business venture. The analysis of this model shows that business ventures have a much higher survival probability when they reduce their future cash-flow volatility. It is also shown that when risks cannot be controlled or are too expensive to be controlled, then business ventures need to have adequate cash reserves if they are to reduce failure density and cumulative failure probability.
Volume (Year): 11 (2006)
Issue (Month): 3 (Fall)
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- Mark Gertler & Simon Gilchrist, 1994.
"Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms,"
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- John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06. Full references (including those not matched with items on IDEAS)
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