Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
960823 | Journal of Financial Intermediation | 2007 | 40 Pages |
Abstract
We show theoretically that while cash allows financially constrained firms to hedge future investment against income shortfalls, reducing current debt is a more effective way to boost investment in future high cash flow states. Thus, constrained firms prefer higher cash to lower debt if their hedging needs are high, but lower debt to higher cash if their hedging needs are low. We provide empirical evidence that supports our theory. Our analysis points to an important hedging motive behind cash and debt management policies. It suggests that cash should not be viewed as negative debt in the presence of financing frictions.
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Authors
Viral V. Acharya, Heitor Almeida, Murillo Campello,