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Cyclicality of growth opportunities and the value of cash holdings

Meike Ahrends, Wolfgang Drobetz and Tatjana Xenia Puhan

Journal of Financial Stability, 2018, vol. 37, issue C, 74-96

Abstract: We show that business cycle dynamics and, in particular, the cyclicality of a firm’s growth opportunities, determine the value of corporate cash holdings. An additional dollar of cash is more valuable for firms with less procyclical expansion opportunities. This valuation effect is strongest for low leverage and high R&D firms, but is independent of their financial status. Corporate cash holdings provide the flexibility to invest for firms that have expansion opportunities during crisis times with business cycle downturns and supply-side financial constraints. Cash holdings in firms with less procyclical growth opportunities are associated with higher investment and better operating performance.

Keywords: Business cycle; Cash holdings; Value of cash; Growth opportunities (search for similar items in EconPapers)
JEL-codes: G30 G32 (search for similar items in EconPapers)
Date: 2018
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