What Determines the Composition of a Firm's Cash Reserves?

59 Pages Posted: 7 Feb 2014 Last revised: 13 Dec 2018

See all articles by Laura Cardella

Laura Cardella

Texas Tech University

Douglas J. Fairhurst

Washington State University

Sandy Klasa

University of Arizona - Department of Finance

Date Written: December 11, 2018

Abstract

We use several different identification strategies to investigate what determines variation in the composition of the financial assets that make up corporate cash reserves. The degree to which a firm invests its cash reserves in less liquid, longer-maturity securities that earn a higher yield is explained by (i) financial constraints, ii) its ability to accurately forecast its short-term liquidity needs, (iii) its likelihood of defaulting on its debt, and (iv) the availability of liquidity provided by a credit line. We further show that the composition of a firm’s cash reserves can affect its real investment and value. Our findings provide insights on an important component of corporate liquidity management practices.

Keywords: Cash holdings, corporate liquidity management, credit lines

JEL Classification: G31, G32

Suggested Citation

Cardella, Laura and Fairhurst, Douglas J. and Klasa, Sandy, What Determines the Composition of a Firm's Cash Reserves? (December 11, 2018). Available at SSRN: https://ssrn.com/abstract=2391467 or http://dx.doi.org/10.2139/ssrn.2391467

Laura Cardella

Texas Tech University ( email )

Lubbock, TX 79409
United States

Douglas J. Fairhurst

Washington State University ( email )

Todd Hall
P.O. Box 644746
Pullman, WA WA 85721-0108
United States

Sandy Klasa (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

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