Precautionary Saving in a Financially Constrained Firm

Andrew B Abel and Stavros Panageas

The Review of Financial Studies, 2023, vol. 36, issue 7, 2878-2921

Abstract: For a firm that cannot raise external funds, cash on hand serves as precautionary saving. We derive a closed-form expression for the target level of cash on hand in the presence of persistent cash flows. Contrary to conventional wisdom, a mean-preserving increase in the volatility of cash flow can decrease this target. Over the set of admissible parameter values, the average impact of volatility on the target is zero. Endogenous selection, reflecting termination of firms that run out of cash, leads to a positive average impact of volatility on the target level of cash, consistent with empirical findings.

JEL-codes: G3 G35 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Precautionary Saving in a Financially-Constrained Firm (2020)
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