The Dynamics of Cash

53 Pages Posted: 15 Mar 2010 Last revised: 11 May 2010

See all articles by Amy K. Dittmar

Amy K. Dittmar

University of Michigan at Ann Arbor - The Stephen M. Ross School of Business

Ran Duchin

University of Washington - Michael G. Foster School of Business

Date Written: May 2010

Abstract

Little is known about how firms manage cash policy over time. This paper fills this gap by examining if and how firms manage cash toward a target cash ratio. Estimating partial adjustment models of cash, we find that firms actively adjust their cash toward a target; however, the speed of adjustment is slow and there is large dispersion in the speed of adjustment across firms. We investigate the causes for this and find evidence consistent with the presence of adjustment costs. We also examine the implications of these results for previous interpretations of cross-sectional results. To do this, we simulate firms’ cash paths allowing for costly adjustment and find that the emerging patterns question the interpretation of some of the standard results in the empirical cash literature

Keywords: cash, liquidity, adjustment costs, financial constraints

JEL Classification: G30, G31, G32

Suggested Citation

Dittmar, Amy and Duchin, Ran, The Dynamics of Cash (May 2010). Ross School of Business Paper No. 1138. Available at SSRN: https://ssrn.com/abstract=1569529 or http://dx.doi.org/10.2139/ssrn.1569529

Amy Dittmar (Contact Author)

University of Michigan at Ann Arbor - The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-764-3108 (Phone)

HOME PAGE: http://webuser.bus.umich.edu/adittmar/

Ran Duchin

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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