The Sensitivity of Cash Savings to the Cost of Capital

Viral Acharya, Soku Byoun and Zhaoxia Xu

No 15059, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We theoretically and empirically show that in the presence of a time-varying cost of capital (COC), fi rms save from external capital when the firm-specifi c COC is low to hedge against the risk of underinvestment due to a higher COC in the future. This hedging motive drives the sensitivity of cash saving to the COC in both fi nancially constrained and currently unconstrained firms. This sensitivity is especially pronounced among firms that tend to face a higher COC when in need of external fi nance. These firms with high hedging motives issue excess capital to save cash when the COC is lower. Such cash saving behavior is influenced by future investments.

Keywords: Hedging; Precautionary motive; Market timing; Financial constraint (search for similar items in EconPapers)
JEL-codes: G32 G35 (search for similar items in EconPapers)
Date: 2020-07
New Economics Papers: this item is included in nep-cfn and nep-ore
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Citations: View citations in EconPapers (14)

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Working Paper: The Sensitivity of Cash Savings to the Cost of Capital (2020)
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