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The Sensitivity of Cash Savings to the Cost of Capital

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  • Acharya, Viral
  • Byoun, Soku
  • Xu, Zhaoxia

Abstract

We theoretically and empirically show that in the presence of a time-varying cost of capital (COC), rms save cash from external capital when the rm-speci c COC is low to hedge against the risk of underinvestment due to a higher COC in the future. This hedging motive drives the sensitivity of cash savings to the COC in both nancially constrained and currently unconstrained rms. This sensitivity is especially pronounced among rms with a stronger correlation between their COC and nancing needs for future investments. Cash savings are more sensitive to the cost of equity than to the cost of debt.

Suggested Citation

  • Acharya, Viral & Byoun, Soku & Xu, Zhaoxia, 2020. "The Sensitivity of Cash Savings to the Cost of Capital," CEPR Discussion Papers 15059, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15059
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    More about this item

    Keywords

    Hedging; Precautionary motive; Market timing; Financial constraint;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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