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Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies


Heitor Almeida


University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Murillo Campello


Cornell University; National Bureau of Economic Research (NBER)

May 16, 2006

London Business School IFA Working Paper Series

Abstract:     
We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows financially constrained firms to hedge future investment against income shortfalls, reducing current debt (saving debt capacity) is a more effective way to boost investment in future high cash flow states. This tradeoff implies that constrained firms will prefer cash to debt capacity if their hedging needs are high (i.e., if the correlation between operating income and investment opportunities is low), but will prefer debt capacity to cash if their hedging needs are low. The empirical examination of cash and debt policies of a large sample of constrained and unconstrained firms reveals evidence that is consistent with our theory. In particular, financially constrained firms with high hedging needs show a strong propensity to save cash out of cash flows, while displaying no propensity to reduce debt. In contrast, constrained firms with low hedging needs systematically channel cash flows towards debt reduction, as opposed to cash savings. Our analysis points to an important hedging motive behind standard financial policies such as cash and debt management. It suggests that cash should not be viewed as negative debt in the presence of financing frictions.

Number of Pages in PDF File: 50

Keywords: Risk management, financing frictions, investment, cash savings, debt capacity

JEL Classification: G31, G32

working papers series


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Date posted: January 19, 2005  

Suggested Citation

Almeida, Heitor and Acharya, Viral V. and Campello, Murillo, Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies (May 16, 2006). London Business School IFA Working Paper Series. Available at SSRN: http://ssrn.com/abstract=650997 or http://dx.doi.org/10.2139/ssrn.650997

Contact Information

Heitor Almeida
University of Illinois at Urbana-Champaign ( email )
515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)
HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Viral V. Acharya (Contact Author)
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Murillo Campello
Cornell University ( email )
114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States
HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
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