The benefits of holding cash: a real options approach

Abstract

Companies need to decide on the optimal amounts of cash to hold. Although this problem has long been acknowledged as a major issue for corporations, new advances in the finance literature have not been fully implemented in this area. We propose here what we believe is the first modelization of a real options approach to determine the financial benefits of holding cash. We measure the benefits of holding cash if raising new capital takes time, is costly and if the firm faces the risk of having to issue underpriced securities to obtain that capital. We show that the methodology proposed leads to non‐intuitive results that warrant further research in the field and should attract academics’ as well practitioners’ attention.