Why Do Firms Sit on Cash? An Asymmetric Information Approach

Milton Harris and Artur Raviv

The Review of Corporate Finance Studies, 2017, vol. 6, issue 2, 141-173

Abstract: In this paper, we build a simple formal model of cash holdings that can explain this and other empirical regularities. Our model is based on the well-known “lemons” problem associated with equity issuance. We show that firms with poor growth opportunities and those with excellent opportunities will not hold excess cash, whereas firms with opportunities in the middle range will hold excess cash. We derive empirical implications relating excess cash to the extent of asymmetric information, growth opportunities, value of assets in place, and cash holding costs.

JEL-codes: G32 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:oup:rcorpf:v:6:y:2017:i:2:p:141-173.

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