Cash Policies and Firm Size

84 Pages Posted: 20 Apr 2022 Last revised: 11 Jan 2023

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: December 1, 2021

Abstract

Understanding firms' demand for cash is critical for answering many economic questions. We develop a model of firm dynamics allowing for heterogeneous size. The firm faces costly financing, fixed costs, and decreasing returns to scale. Surprisingly, the firm's demand for cash is U-shaped in firm size. When the firm is small, growth lowers cash demand because the relative size of the fixed costs declines sharply. Eventually, growth increases cash demand as the scale of the cash flow shocks increases. Consequently, cash holdings and issuance amounts (payout rates) are U-shaped (hump-shaped) in firm size. We find empirical support for these predictions.

Keywords: Cash holdings, liquidity management, financial flexibility, costly financing

JEL Classification: E22, G30, G31, G35

Suggested Citation

Kakhbod, Ali and Reppen, Anders and Umar, Tarik and Xing, Hao, Cash Policies and Firm Size (December 1, 2021). 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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