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Corporate Cash Savings: Precaution versus Liquidity

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  • Martin Boileau
  • Nathalie Moyen

Abstract

Cash holdings as a proportion of total assets of U.S. corporations have roughly doubled between 1971 and 2006. Prior research attributes the large cash increase to a rise in firms’ idiosyncratic risk. We investigate two mechanisms by which increased idiosyncratic risk can lead to higher cash holdings. The first is linked to the precautionary motive inducing firms to be prudent about their future prospects. The second mechanism is linked to the liquidity motive requiring firms to meet their current liquidity needs. We find that the mechanism embedded in the liquidity motive best explains how the increased idiosyncratic risk nearly doubled cash holdings. As for the precautionary motive, its importance has decreased over time to the point generating very little precautionary savings.

Suggested Citation

  • Martin Boileau & Nathalie Moyen, 2009. "Corporate Cash Savings: Precaution versus Liquidity," Cahiers de recherche 0953, CIRPEE.
  • Handle: RePEc:lvl:lacicr:0953
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    Cited by:

    1. Auray, Stéphane & de Blas, Beatriz, 2013. "Investment, matching and persistence in a modified cash-in-advance economy," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 591-610.
    2. repec:eee:moneco:v:87:y:2017:i:c:p:13-33 is not listed on IDEAS
    3. 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.

    More about this item

    Keywords

    Dynamic Capital Structure; cash holdings; precautionary savings; corporate liquidity;

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • 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
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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