Cash Holdings and Financing Decisions Under Ambiguity

Quaderni - Working Paper DSE N° 979

22 Pages Posted: 18 Nov 2014

See all articles by Elettra Agliardi

Elettra Agliardi

University of Bologna - Department of Economics

Rossella Agliardi

University of Bologna - Faculty of Mathematical, Physical and Natural Sciences

Willy Spanjers

Kingston University

Date Written: November 17, 2014

Abstract

This paper addresses the following unresolved questions: Why do some firms issue equity instead of debt? Why did most firms retain their cash holdings instead of distributing them as dividends in recent times? How do firms change their financing policies during a period of severe financial constraints and ambiguity, or when facing the threat of an unpredictable financial crisis? We analyze how the values of the firm’s equity and debt are affected by ambiguity. We also show that cash holdings are retained longer if the investors’ ambiguity aversion bias is sufficiently large, while cash holdings become less attractive when the combined impact of ambiguity and ambiguity aversion is relatively low.

Keywords: corporate finance decisions, ambiguity, cash holdings, optimal dividends

JEL Classification: G30, G32, D01, D81

Suggested Citation

Agliardi, Elettra and Agliardi, Rossella and Spanjers, Willy, Cash Holdings and Financing Decisions Under Ambiguity (November 17, 2014). Quaderni - Working Paper DSE N° 979, Available at SSRN: https://ssrn.com/abstract=2526704 or http://dx.doi.org/10.2139/ssrn.2526704

Elettra Agliardi (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore 45
Bologna, 40125
Italy

Rossella Agliardi

University of Bologna - Faculty of Mathematical, Physical and Natural Sciences ( email )

Bologna
Italy

Willy Spanjers

Kingston University ( email )

Penrhyn Road
Kingston-upon-Thames
Surrey, KT1 2EE
United Kingdom

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