Corporate Cash Savings: Precaution Versus Liquidity

51 Pages Posted: 18 Dec 2010

See all articles by Nathalie Moyen

Nathalie Moyen

University of Colorado at Boulder - Department of Finance

Martin Boileau

University of Colorado at Boulder - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 16, 2010

Abstract

Cash holdings as a proportion of total assets of North American corporations have roughly doubled between 1971 and 2006. Prior research attributes the large cash increase to a rise in firms’ cash flow volatility. We investigate two mechanisms by which increased volatility can lead to higher cash holdings. The first is the precautionary motive inducing firms to be prudent about their future prospects. The second mechanism is the liquidity motive requiring firms to meet their current liquidity needs. We find that the liquidity motive best explains how the increased volatility nearly doubled cash holdings.

Keywords: dynamic capital structure, cash holdings, precautionary savings, corporate liquidity

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

Suggested Citation

Moyen, Nathalie and Boileau, Martin, Corporate Cash Savings: Precaution Versus Liquidity (December 16, 2010). Available at SSRN: https://ssrn.com/abstract=1726650 or http://dx.doi.org/10.2139/ssrn.1726650

Nathalie Moyen (Contact Author)

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)

Martin Boileau

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)

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