The Sensitivity of Cash Savings to the Cost of Capital

84 Pages Posted: 14 Jul 2020 Last revised: 8 Sep 2024

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - 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: July 2020

Abstract

We theoretically and empirically show that in the presence of a time-varying cost of capital (COC), firms save from external capital when the firm-specific COC is low to hedge against the risk of underinvestment due to a higher COC in the future. This hedging motive drives the sensitivity of cash saving to the COC in both financially constrained and currently unconstrained firms. This sensitivity is especially pronounced among firms that tend to face a higher COC when in need of external finance. These firms with high hedging motives issue excess capital to save cash when the COC is lower. Such cash saving behavior is influenced by future investments.

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 (July 2020). NBER Working Paper No. w27517, Available at SSRN: https://ssrn.com/abstract=3649882

Viral V. Acharya (Contact Author)

New York University (NYU) - 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

New York University (NYU) - Department of Finance ( email )

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

Centre for Economic Policy Research (CEPR) ( email )

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) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Soku Byoun

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
55
Abstract Views
526
Rank
395,015
PlumX Metrics