Why Do Firms Sit on Cash?: An Asymmetric Information Approach

42 Pages Posted: 13 Jun 2017

Date Written: June 9, 2017

Abstract

Cash holdings of U.S. firms have increased dramatically since 1980. The purpose of this paper is to build a simple formal model of cash holdings that can explain this and other empirical regularities. Our model is based on the well-known “lemons” problem associated with equity issuance. We show that firms with poor growth opportunities and those with excellent opportunities will not hold excess cash, while firms with opportunities in the middle range will hold excess cash. We derive empirical implications relating excess cash to the extent of asymmetric information, growth opportunities, value of assets in place, and cash holding costs.

Keywords: Cash Holdings, Asymmetric Information

JEL Classification: G32

Suggested Citation

Harris, Milton and Raviv, Artur, Why Do Firms Sit on Cash?: An Asymmetric Information Approach (June 9, 2017). Available at SSRN: https://ssrn.com/abstract=2984276 or http://dx.doi.org/10.2139/ssrn.2984276

Milton Harris (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
(773) 702-2549 (Phone)
(773) 753-8310 (Fax)

HOME PAGE: http://faculty.chicagobooth.edu/milton.harris/

Artur Raviv

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States
847-491-8342 (Phone)
847-491-5719 (Fax)

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