Cash holdings, ambiguity aversion, and investment puzzles

Zhiming Zhao, Yuyao Liu and Qiong Pan

Economics Letters, 2023, vol. 229, issue C

Abstract: We consider a real options model with ambiguity to investigate how cash holdings and ambiguity aversion affect a firm’s dynamic investments. First, we prove a unique positive ambiguity coefficient exists when ambiguity exceeds it such that entrepreneurs believe the project is “too valueless to invest in”. Second, the coupons demanded by creditors increase with ambiguity, and cash holdings reduce the ambiguity premium. Our research provides a new explanation as to why companies abandon investment and hold more cash under the influence of the COVID-19 pandemic.

Keywords: Ambiguity aversion; Cash holdings; Investment; Pricing deviation (search for similar items in EconPapers)
JEL-codes: G11 G14 G32 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:229:y:2023:i:c:s0165176523002173

DOI: 10.1016/j.econlet.2023.111192

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