Financial Constraints, Investment, and the Value of Cash Holdings

38 Pages Posted: 15 Nov 2007

See all articles by David J. Denis

David J. Denis

University of Pittsburgh

Valeriy Sibilkov

University of Wisconsin - Milwaukee - Department of Finance

Date Written: November 14, 2007

Abstract

We provide robust evidence that cash holdings are more valuable for financially constrained firms than for unconstrained firms and investigate why this is so. Our results indicate that greater cash holdings are associated with higher levels of investment for both constrained and unconstrained firms, but that the marginal value of investment is greater for constrained firms. These findings suggest that higher cash holdings allow constrained firms to undertake value-increasing projects that might otherwise be bypassed. As such, the evidence is consistent with the hypothesis that greater cash holdings of constrained firms are a value-increasing response to costly external financing.

Keywords: cash, cash holdings, investment, financial constraints

JEL Classification: G30, G31

Suggested Citation

Denis, David J. and Sibilkov, Valeriy, Financial Constraints, Investment, and the Value of Cash Holdings (November 14, 2007). Available at SSRN: https://ssrn.com/abstract=1030065 or http://dx.doi.org/10.2139/ssrn.1030065

David J. Denis (Contact Author)

University of Pittsburgh ( email )

Katz Graduate School of Business
Pittsburgh, PA 15260
United States
412-648-1708 (Phone)

Valeriy Sibilkov

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

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