Cyclicality of Growth Opportunities and the Value of Cash Holdings

68 Pages Posted: 16 Aug 2015 Last revised: 3 Aug 2016

See all articles by Meike Ahrends

Meike Ahrends

University of Hamburg

Wolfgang Drobetz

Hamburg University

Tatjana Xenia Puhan

University of Mannheim - Department of International Finance; Swiss Life Asset Managers

Date Written: August 3, 2016

Abstract

We show that business cycle dynamics and, in particular, the cyclicality of a firm’s growth opportunities, determine the value of cash holdings. Cash is more valuable for firms with relatively more attractive growth opportunities in bad states of the business cycle. Cash holdings provide the flexibility to invest even in times when capital supply is scarce. This valuation effect is strongest for low leverage and high R&D firms, but is independent of their financial status. In firms where changes in cash holdings exert a stronger effect on stock returns, investment and operating performance are also more sensitive to cash holdings.

Keywords: Business cycle, cash holdings, value of cash, growth opportunities

JEL Classification: G30, G32

Suggested Citation

Ahrends, Meike and Drobetz, Wolfgang and Puhan, Tatjana Xenia, Cyclicality of Growth Opportunities and the Value of Cash Holdings (August 3, 2016). Available at SSRN: https://ssrn.com/abstract=2644749 or http://dx.doi.org/10.2139/ssrn.2644749

Meike Ahrends (Contact Author)

University of Hamburg ( email )

Von-Melle-Park 5
Hamburg, 20146
Germany

Wolfgang Drobetz

Hamburg University ( email )

Moorweidenstrasse 18
Hamburg, 20148
Germany

Tatjana Xenia Puhan

University of Mannheim - Department of International Finance ( email )

L9, 1-2
Mannheim, 68131
Germany

Swiss Life Asset Managers ( email )

General-Guisan-Quai 40
Zurich, 8022
Switzerland

HOME PAGE: http://www.swisslife-am.com/de/home.html

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