The Sensitivity of Cash Savings to the Cost of Capital

68 Pages Posted: 28 Jul 2020 Last revised: 16 Aug 2020

See all articles by Viral V. Acharya

Viral V. Acharya

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: July 2020

Abstract

We show theoretically and empirically that in the presence of a time-varying cost

of capital (COC), firms have a hedging motive to reduce the overall COC over time

by saving cash when COC is relatively low. The sensitivity of cash savings to COC

is especially pronounced with respect to the cost of equity and for firms with greater

correlation between COC and financing needs for future investments. Both financially

constrained and unconstrained firms respond to low COC by saving cash out of external

capital issuance in excess of current financial needs.

Keywords: Financial constraint, Hedging, market timing, Precautionary motive

JEL Classification: G32, G35

Suggested Citation

Acharya, Viral V. and Byoun, Soku and Xu, Zhaoxia, The Sensitivity of Cash Savings to the Cost of Capital (July 2020). CEPR Discussion Paper No. DP15059, Available at SSRN: https://ssrn.com/abstract=3661402

Viral V. Acharya (Contact Author)

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

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

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

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
0
Abstract Views
130
PlumX Metrics