Corporate Cash Savings: Precaution versus Liquidity

Martin Boileau and Nathalie Moyen

Cahiers de recherche from CIRPEE

Abstract: Cash holdings as a proportion of total assets of U.S. corporations have roughly doubled between 1971 and 2006. Prior research attributes the large cash increase to a rise in firms’ idiosyncratic risk. We investigate two mechanisms by which increased idiosyncratic risk can lead to higher cash holdings. The first is linked to the precautionary motive inducing firms to be prudent about their future prospects. The second mechanism is linked to the liquidity motive requiring firms to meet their current liquidity needs. We find that the mechanism embedded in the liquidity motive best explains how the increased idiosyncratic risk nearly doubled cash holdings. As for the precautionary motive, its importance has decreased over time to the point generating very little precautionary savings.

Keywords: Dynamic Capital Structure; cash holdings; precautionary savings; corporate liquidity (search for similar items in EconPapers)
JEL-codes: E21 E22 G31 G32 G35 (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0953

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