Cash Holdings, Precautionary Motives, and Systematic Uncertainty
50 Pages Posted: 11 Aug 2014 Last revised: 23 Jun 2017
Date Written: June 21, 2017
We study the effect of systematic uncertainty on firms' precautionary saving motives. As systematic uncertainty changes firms' operational and investment policies, its implications on firm cash holdings remain unclear. Using a GARCH-model based methodology, we construct novel, forward-looking measures of firms' exposure to systematic uncertainty through firms' future cash needs and their costs of external financing. We find that systematic uncertainty increases firm cash holdings through both channels. Moreover, firms with cyclical access to external financing are more affected by systematic uncertainty through the cost-of-capital channel, while firms with unstable cash flows are more affected through the cash-needs channel.
Keywords: Cash holdings, systematic uncertainty, precautionary saving
JEL Classification: G30, G32, D8, E32
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