European Finance Review · 2016 · 32 citations · 56 references
BusinessFinanceFinancial ManagementCash ManagementCorporate FinanceFinancial EconomicsBehavioral Corporate FinanceCognitive Biases In InvestingDiscounted Cash Flow ValuationFinancial RiskInvestor PsychologyInvestor SentimentCapital Budgeting DecisionsCapital Budgeting Under RiskCash Budgeting Under UncertaintyCash Flow Under UncertaintyCorporate Cash HoldingsCorporate Financing BehaviorFinancing Under UncertaintyInformation Asymmetry Effects
Abstract Previous literature on cash management has revealed that firms hoard cash to protect themselves against external financing constraints that might limit future capital budgeting policies. In a theoretical model based on this finding, we analyze how investors’ attitude toward uncertain investment returns affects the valuation of cash and the amount of cash holdings. Subsequently, we show empirically that cash holdings become less valuable with increasing ambiguity aversion in line with our model. We also demonstrate that managers react accordingly and lower cash holdings if their investors tend to be more ambiguity-averse. Several robustness tests confirm our findings.
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