Why Do Firms Sit on Cash?: An Asymmetric Information Approach
42 Pages Posted: 13 Jun 2017
Date Written: June 9, 2017
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: Suggested Citation