Precautionary Cash Holdings as An Operating Asset and Financial Statement Analysis

47 Pages Posted: 15 Apr 2024

See all articles by Chandrani Chatterjee

Chandrani Chatterjee

University of Texas at Arlington - Department of Accounting

Anup Srivastava

University of Calgary - Haskayne School of Business

Date Written: August 10, 2024

Abstract

Firms' cash holdings have dramatically increased over time, which is a puzzling phenomenon because surplus cash could encourage managers to make value-destroying decisions. However, cash can be value preserving if it enables firms to withstand unexpected shocks. We examine the latter explanation in this paper. We provide a method to calculate the amount of cash a firm must keep in order to achieve a desired level of continuity; that is, to keep the firm failure risk below a given threshold. We show that this insurance amount, which we argue is an operating asset, similar to keeping inventory to weather demand and supply shocks, differs based on firm operating characteristics and economic environment. Considering a portion of cash as an operating asset has implications for financial statement analysis and firm performance measurement. It changes how firm's assets, financial position, and operating performance are calculated.

Keywords: Cash holding, Precautionary motive, Working capital, Operating asset, Delisting, Idiosyncratic volatility, Financial statement analysis JEL Classifications: M21, M41, G32, G33

JEL Classification: G32, G33, M41

Suggested Citation

Chatterjee, Chandrani and Srivastava, Anup, Precautionary Cash Holdings as An Operating Asset and Financial Statement Analysis (August 10, 2024). Available at SSRN: https://ssrn.com/abstract=4779544 or http://dx.doi.org/10.2139/ssrn.4779544

Chandrani Chatterjee

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

Anup Srivastava (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

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