Investment, payout, and cash management under risk and ambiguity

Pengfei Luo and Yuan Tian

Journal of Banking & Finance, 2022, vol. 141, issue C

Abstract: This study extends the theoretical model of dynamic investment, dividend payout, costly external financing, and liquidation for financially constrained firms by incorporating ambiguity. We demonstrate that ambiguity aversion induces a trade-off between the “bird-in-hand” effect and an amplified precautionary motive in determining firms’ cash management, which consequently affects firms’ investment, dividend payout, costly external financing, and liquidation decisions. Unlike the models considering risk only, we identify a non-monotonic relationship between the endogenous payout boundary and ambiguity aversion. Our model generates several new implications, including providing an explanation for the high cash holdings and speed-up of asset sales during the recent COVID-19 crisis.

Keywords: Finance; Ambiguity; Cash holdings; Investment; Payout (search for similar items in EconPapers)
JEL-codes: D25 G32 G33 G35 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:141:y:2022:i:c:s0378426622001479

DOI: 10.1016/j.jbankfin.2022.106551

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