Why is Cash U-Shaped in Firm Size?

96 Pages Posted: 20 Apr 2022 Last revised: 3 Jan 2024

See all articles by Ali Kakhbod

Ali Kakhbod

University of California, Berkeley

A. Max Reppen

Boston University - Questrom School of Business

Tarik Umar

Rice University

Hao Xing

Boston University - Questrom School of Business

Date Written: November 7, 2023

Abstract

We document a new empirical fact: the level of cash holdings is U-shaped in firm size. To rationalize this finding, we develop a continuous-time model of firm dynamics with costly financing that is not homothetic in firm size. Cash levels are U-shaped in firm size due to the interplay of investment and hedging incentives. When a firm is small, cash levels decrease with size because the firm uses cash to grow, capitalizing on better investment opportunities. As the firm grows, investing slows and cash levels eventually increase to hedge larger-scale cash flow shocks.

Keywords: Cash holdings, liquidity management, costly financing

JEL Classification: E22, G30, G31, G35

Suggested Citation

Kakhbod, Ali and Reppen, Anders and Umar, Tarik and Xing, Hao, Why is Cash U-Shaped in Firm Size? (November 7, 2023). Available at SSRN: https://ssrn.com/abstract=4079159 or http://dx.doi.org/10.2139/ssrn.4079159

Ali Kakhbod (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Anders Reppen

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Tarik Umar

Rice University ( email )

Houston, TX
United States

HOME PAGE: http://https://business.rice.edu/person/tarik-umar

Hao Xing

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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