The Real Option Value of Cash

Forthcoming in the Review of Finance

67 Pages Posted: 12 Dec 2010 Last revised: 30 Jan 2013

See all articles by Michael Kisser

Michael Kisser

Norwegian School of Economics (NHH)

Date Written: August 2012

Abstract

This paper focuses on the idea that cash has a real option value and it presents an explicit valuation framework of cash holdings in the context of a capacity expansion option. The model characterizes the optimal dynamic cash retention policy, the value of internal funds and it provides a model implied regression specification based on simulated data. Results imply that high cash flow volatility decreases the value of cash and that optimal cash retention can actually delay investment relative to the case of full outside financing. Both novel implications are confirmed by subsequent empirical tests.

Keywords: Real Options, Cash Holdings, Payout Policy, Investment

JEL Classification: G31, G32, G35

Suggested Citation

Kisser, Michael, The Real Option Value of Cash (August 2012). Forthcoming in the Review of Finance. Available at SSRN: https://ssrn.com/abstract=1724082 or http://dx.doi.org/10.2139/ssrn.1724082

Michael Kisser (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Register to save articles to
your library

Register

Paper statistics

Downloads
244
rank
122,352
Abstract Views
1,804
PlumX Metrics