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Capital Supply Uncertainty, Cash Holdings, and Investment

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  • Julien HUGONNIER

    (EPFL and Swiss Finance Instiute)

  • Semyon MALAMUD

    (EPFL and Swiss Finance Instiute)

  • Erwan MORELLEC

    (EPFL, Swiss Finance Instiute, and CEPR)

Abstract

We develop a model of investment, payout, and nancing policies in which rms face uncertainty regarding their ability to raise funds and have to search for investors when in need of capital. We show that capital supply uncertainty leads rms to value nancial slack and to adjust their policies to the level of their cash reserves, notably when choosing between retention and payout, between internal or external nancing of investment, and between speculation and hedging. In the model, investment and payout do not always increase with slack for constrained rms and the choice between internal and external funds does not follow a strict pecking order. In addition, the use of inside and outside cash are related to a number of rm characteristics, such as asset tangibility, cash ow volatility, access to capital markets, or agency costs.

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  • Julien HUGONNIER & Semyon MALAMUD & Erwan MORELLEC, "undated". "Capital Supply Uncertainty, Cash Holdings, and Investment," Swiss Finance Institute Research Paper Series 11-44, Swiss Finance Institute.
  • Handle: RePEc:chf:rpseri:rp1144
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    1. repec:dau:papers:123456789/12476 is not listed on IDEAS
    2. Max Reppen & Jean-Charles Rochet & H. Mete Soner, 2017. "Dividends with random profitability rate," Papers 1706.01813, arXiv.org, revised Jul 2017.
    3. Pierre, Erwan & Villeneuve, Stéphane & Warin, Xavier, 2016. "Numerical approximation of a cash-constrained firm value with investment opportunities," TSE Working Papers 16-637, Toulouse School of Economics (TSE).
    4. repec:eee:jfinec:v:124:y:2017:i:2:p:395-414 is not listed on IDEAS
    5. Erwan Pierre & St'ephane Villeneuve & Xavier Warin, 2016. "Numerical approximation of a cash-constrained firm value with investment opportunities," Papers 1603.09049, arXiv.org, revised Oct 2016.
    6. Andrea Barth & Santiago Moreno–Bromberg & Oleg Reichmann, 2016. "A Non-stationary Model of Dividend Distribution in a Stochastic Interest-Rate Setting," Computational Economics, Springer;Society for Computational Economics, vol. 47(3), pages 447-472, March.
    7. Agliardi, Elettra & Agliardi, Rossella & Spanjers, Willem, 2016. "Corporate financing decisions under ambiguity: Pecking order and liquidity policy implications," Journal of Business Research, Elsevier, vol. 69(12), pages 6012-6020.
    8. Manso, Gustavo, 2013. "Feedback effects of credit ratings," Journal of Financial Economics, Elsevier, vol. 109(2), pages 535-548.
    9. Pierre, Erwan & Villeneuve, Stéphane & Warin, Xavier, 2016. "Numerical approximation of a cash-constrained firm value with investment opportunities," IDEI Working Papers 860, Institut d'Économie Industrielle (IDEI), Toulouse.
    10. Villeneuve, Stéphane & Warin, Xavier, 2012. "Optimal Liquidity Management and Hedging in the presence of a non predictable investment opportunity," TSE Working Papers 12-266, Toulouse School of Economics (TSE).
    11. Erwan Pierre & Stéphane Villeneuve & Xavier Warin, 2016. "Liquidity management with decreasing returns to scale and secured credit line," Finance and Stochastics, Springer, vol. 20(4), pages 809-854, October.
    12. repec:eee:jfinec:v:125:y:2017:i:2:p:266-285 is not listed on IDEAS
    13. Andrea L. Eisfeldt & Tyler Muir, 2014. "Aggregate External Financing and Savings Waves," NBER Working Papers 20442, National Bureau of Economic Research, Inc.
    14. Patrick Bolton & Hui Chen & Neng Wang, 2014. "Debt, Taxes, and Liquidity," NBER Working Papers 20009, National Bureau of Economic Research, Inc.
    15. Patrick Bolton & Neng Wang & Jinqiang Yang, 2014. "Investment Under Uncertainty and the Value of Real and Financial Flexibility," NBER Working Papers 20610, National Bureau of Economic Research, Inc.
    16. Boot, Arnoud W A & Vladimirov, Vladimir, 2016. "Non-Precautionary Cash Hoarding and the Evolution of Growth Firms," CEPR Discussion Papers 11510, C.E.P.R. Discussion Papers.
    17. Marti G. Subrahmanyam & Dragon Yongjun Tang & Sarah Qian Wang, 2016. "Credit Default Swaps, Exacting Creditors and Corporate Liquidity Management," Working Papers 202016, Hong Kong Institute for Monetary Research.
    18. Yujun Lian & Mohamad Sepehri & Maggie Foley, 2011. "Corporate Cash Holdings and Financial Crisis: An Empirical Study of Chinese Companies," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 1(2), pages 112-124, December.

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    Keywords

    Capital supply uncertainty; cash holdings; real investment; search;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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