Corporate Cash Savings: Precaution Versus Liquidity

CIRPEE Working Paper 09-53

48 Pages Posted: 8 Jan 2010

See all articles by Martin Boileau

Martin Boileau

University of Colorado at Boulder - Department of Economics

Nathalie Moyen

University of Colorado at Boulder - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: January 7, 2010

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.

Keywords: Dynamic Capital Structure, Cash holdings, precautionary savings, corporate liquidity

JEL Classification: G31, G32, G35, E21, E22

Suggested Citation

Boileau, Martin and Moyen, Nathalie, Corporate Cash Savings: Precaution Versus Liquidity (January 7, 2010). CIRPEE Working Paper 09-53. Available at SSRN: https://ssrn.com/abstract=1532811 or http://dx.doi.org/10.2139/ssrn.1532811

Martin Boileau (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States
(303) 492-2108 (Phone)
(303) 492-8960 (Fax)

Nathalie Moyen

University of Colorado at Boulder - Department of Finance ( email )

Campus Box 419
Boulder, CO 80309
United States
303-735-4931 (Phone)
303-492-5962 (Fax)

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