Policy Uncertainty and Cash Dynamics

48 Pages Posted: 20 Jun 2019

See all articles by Daniel Tut

Daniel Tut

Ryerson University- Ted Rogers School of Management

Date Written: April 12, 2019

Abstract

Why and when do firms optimally deviate from target cash? And why do we observe imperfect adjustment of cash? In this paper, we postulate and provide evidence that policy uncertainty induces financing frictions and adjustment costs which decelerate the speed of adjustment (SOA) of cash toward target. We also find that the effects of policy uncertainty on SOA are higher for firms that operate below target cash than for firms that operate above target cash. Firms that operate below target cash accelerate SOA while firms that operate above target cash decelerate SOA. Overall, the results suggest that in the face of policy uncertainty shocks, firms optimally deviate from target cash as the expected benefit of deviation is greater than the expected value of approaching the target.

Keywords: Cash, Liquidity, Adjustment Costs, Adjustment Speed, Policy Uncertainty

JEL Classification: G30, G31, G32

Suggested Citation

Tut, Daniel, Policy Uncertainty and Cash Dynamics (April 12, 2019). Available at SSRN: https://ssrn.com/abstract=3403775 or http://dx.doi.org/10.2139/ssrn.3403775

Daniel Tut (Contact Author)

Ryerson University- Ted Rogers School of Management ( email )

55 Dundas St. W
Toronto, Ontario M5G 2C3
Canada

HOME PAGE: http://sites.google.com/view/danieltut/home

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