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Expectancy balance model for cash flow

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  • Marcos Melo
  • Feruccio Bilich

Abstract

Economic agents try to find out the composition of different forms of assets, and the amount of each, that maximizes total wealth. The money demanded by firms is a function of the benefits and costs of holding it considering other forms of assets. The money held in cash can be remunerated by some earning asset. Even when the money is invested in bank funds or bonds, the interest rate is usually lower than the return that the firm’s business may yield. When the firm keeps idle money in cash, the firm renounces to part of its profitability, incurring in the opportunity cost of not investing in alternatives, named Holding Cost. If the firm gives preference to other assets over cash, the balance level may be insufficient for its disbursement needs. The Shortage Cost is the price of obtaining money by other means. The Expectancy Balance Model (EBM) proposed minimizes the Total Cost (combined Holding and Shortage Costs) of maintaining and transforming money from or into other forms of assets. The EBM is an instrument of cash flow decision that deals with the demand for money by firms employing the maximizing utility of total wealth (set of assets) rule. Copyright Springer Science+Business Media, LLC 2013

Suggested Citation

  • Marcos Melo & Feruccio Bilich, 2013. "Expectancy balance model for cash flow," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 37(2), pages 240-252, April.
    • Handle: RePEc:spr:jecfin:v:37:y:2013:i:2:p:240-252
    DOI: 10.1007/s12197-011-9180-0
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    More about this item

    Keywords

    Corporate Finance; Demand for Money; Cash Flow Optimization; Cash Flow Forecast; D92; E41; G11; G30;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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