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Cash Holdings and Business Conditions

43 Pages Posted: 25 Oct 2004  

Miguel A. Ferreira

Nova School of Business and Economics; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Claudia Custodio

Imperial College London; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Clara C. Raposo

Technical University of Lisbon (UTL) - School of Economics and Management

Date Written: February 2005

Abstract

We investigate the relation between business conditions and corporate liquidity decisions by US firms. We find strong evidence that financially constrained firms hold more cash during recessions and that business conditions are significant to constrained firms' cash decisions. In contrast, we find weak evidence that financially unconstrained firms adjust cash holdings according to the business cycle. This asymmetric behavior is more pronounced for changes in the short-term interest rate. Moreover, we find that firms increase the level of liquidity during periods of tighter credit conditions. Our findings support both the precautionary motive for holding cash and the pecking order theory.

Keywords: Cash holdings, Liquidity, Business conditions

JEL Classification: G3, G32, G39

Suggested Citation

Ferreira, Miguel A. and Custodio, Claudia and Raposo, Clara C., Cash Holdings and Business Conditions (February 2005). Available at SSRN: https://ssrn.com/abstract=608664 or http://dx.doi.org/10.2139/ssrn.608664

Miguel Almeida Ferreira (Contact Author)

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Claudia Custodio

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Clara C. Raposo

Technical University of Lisbon (UTL) - School of Economics and Management ( email )

R. Miguel Lupi, 20
Lisbon, 1200
Portugal

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