The Cash-Cap Model: A Two-State Model of Firm Dynamics

88 Pages Posted: 20 Apr 2022 Last revised: 4 Aug 2022

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

How does a firm's optimal cash, issuance, default, payout, and investment policies vary over its life cycle? To answer this question, we relax the assumption of homogeneity in size in models of firm dynamics. Our Cash-Cap model has two state variables: cash and capital. We find support in the data for new predictions: (1) issuance-to-capital ratios decrease convexly in capital, (2) payout-to-capital ratios are concave in capital, (3) investment-to-cash holdings sensitivities decrease in capital, and (4) cash holdings-to- volatility sensitivities increase in capital. We prove the uniqueness of the model solution and convergence of the numeric algorithm.

Keywords: Cash holdings, payouts, investment, issuance, default, liquidity management, risk management, viscosity solutions

JEL Classification: E22, G12, G32, G33, G35

Suggested Citation

Kakhbod, Ali and Reppen, Anders and Umar, Tarik and Xing, Hao, The Cash-Cap Model: A Two-State Model of Firm Dynamics (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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