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Cash holdings in privately held firms: A closer look on the precautionary motivation for smaller firms

Vivien Lefebvre

Finance, 2021, vol. 42, issue 3, 57-98

Abstract: Firms keep cash as a buffer against external shocks, an attitude referred to as the precautionary motivation for cash holdings. This paper investigates whether the role of the precautionary motivation to hold cash differs across firms of different sizes. We use a large sample of French privately held firms to answer this question. Our results show that smaller firms save more cash out of their cash flows when their cash flows are higher than larger firms. However, larger firms increase their cash holdings more than smaller firms do when cash flows become volatile. These results show that larger firms and smaller firms have different attitudes toward precautionary motivation. Additional results indicate that geographical location is an important factor influencing firms’ propensity to save cash out of their cash flows. Firms in more rural regions save more cash from their cash flows than urban firms. Overall, this paper provides new empirical insights into the cash holdings behaviors of privately held firms.

Keywords: cash holdings; size; risk; precautionary motive (search for similar items in EconPapers)
Date: 2021
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