Precautionary Saving in a Financially-Constrained Firm

Andrew Abel and Stavros Panageas

No 26628, NBER Working Papers from National Bureau of Economic Research, Inc

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: E2 E21 G3 G35 (search for similar items in EconPapers)
Date: 2020-01
New Economics Papers: this item is included in nep-cfn and nep-mac
Note: CF EFG
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Citations: View citations in EconPapers (3)

Published as Andrew B Abel & Stavros Panageas & Stefano Giglio, 2023. "Precautionary Saving in a Financially Constrained Firm," The Review of Financial Studies, vol 36(7), pages 2878-2921.

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Journal Article: Precautionary Saving in a Financially Constrained Firm (2023)
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