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Cash Holdings, Precautionary Motives, and Systematic Uncertainty

50 Pages Posted: 11 Aug 2014 Last revised: 23 Jun 2017

Janet Gao

Indiana University - Kelley School of Business

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC) Herzliyah

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: June 21, 2017

Abstract

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

Suggested Citation

Gao, Janet and Grinstein, Yaniv and Wang, Wenyu, Cash Holdings, Precautionary Motives, and Systematic Uncertainty (June 21, 2017). Available at SSRN: https://ssrn.com/abstract=2478349

Janet Gao (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall
Ithaca, NY 14853
United States
607-255-8686 (Phone)
607-254-4590 (Fax)

Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 46150
Israel

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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