The Sensitivity of Cash Savings to the Cost of Capital

70 Pages Posted: 19 Aug 2020 Last revised: 29 Jun 2021

See all articles by Viral V. Acharya

Viral V. Acharya

Professor; New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Soku Byoun

Baylor University

Zhaoxia Xu

UNSW Australia Business School, School of Banking and Finance

Multiple version iconThere are 3 versions of this paper

Date Written: June 30, 2020

Abstract

We theoretically and empirically show that in the presence of a time-varying cost of capital (COC), firms save cash from external capital when the COC is low to hedge against the risk of underinvestment in the future due to a higher COC. This hedging motive drives the sensitivity of cash savings to the COC in both financially constrained and currently unconstrained firms. This sensitivity is especially pronounced among firms with a greater correlation between their COC and financing needs for future investments. These results cannot be fully explained by either the precautionary motive or the market timing motive for cash.

Keywords: Hedging, Precautionary Motive, Market Timing, Financial Constraint

JEL Classification: G32, G35

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Byoun, Soku and Xu, Zhaoxia, The Sensitivity of Cash Savings to the Cost of Capital (June 30, 2020). NYU Stern School of Business, Available at SSRN: https://ssrn.com/abstract=3631805 or http://dx.doi.org/10.2139/ssrn.3631805

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

Professor ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Soku Byoun (Contact Author)

Baylor University ( email )

Department of Finance Insurance & Real Estate
P.O.Box 98004
Waco, TX 76712
254-710-7849 (Phone)

Zhaoxia Xu

UNSW Australia Business School, School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

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