The Sensitivity of Cash Savings to the Cost of Capital

Viral Acharya, Soku Byoun and Zhaoxia Xu

No 15059, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We theoretically and empirically show that in the presence of a time-varying cost of capital (COC), rms save cash from external capital when the rm-speci 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 savings to the COC in both nancially constrained and currently unconstrained rms. This sensitivity is especially pronounced among rms with a stronger correlation between their COC and nancing needs for future investments. Cash savings are more sensitive to the cost of equity than to the cost of debt.

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
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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