Why Do Firms Hold Cash? Evidence from Demographic Demand Shifts

64 Pages Posted: 17 Dec 2014 Last revised: 22 May 2019

See all articles by Igor Cunha

Igor Cunha

University of Kentucky

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance

Date Written: February 19, 2019

Abstract

We exploit variation in demand induced by demographics to provide causal evidence of the precautionary motive of cash holdings. Specifically, we show that firms significantly increase their cash levels in response to exogenous increases in investment opportunities. We also present the dynamics of accumulation and use of cash in response to changes in forecasted demand. Financially constrained firms build their cash reserves using internal sources. Consequently, they start saving earlier and keep high cash levels longer. Unconstrained firms rely on external financing both to invest and build cash reserves, allowing them to save less and incur lower costs of carry.

Keywords: Cash Holdings, Payout, Precautionary Motive

JEL Classification: G30, G32, G35

Suggested Citation

Cunha, Igor and Pollet, Joshua Matthew, Why Do Firms Hold Cash? Evidence from Demographic Demand Shifts (February 19, 2019). Available at SSRN: https://ssrn.com/abstract=2538566 or http://dx.doi.org/10.2139/ssrn.2538566

Igor Cunha (Contact Author)

University of Kentucky ( email )

Gatton College of Business and Economics
550 S. Limestone
Lexington, KY 40526
United States
859-257-5703 (Phone)

Joshua Matthew Pollet

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States
(217) 344-4311 (Phone)

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