Cash Holdings, Precautionary Motives, and Systematic Uncertainty

50 Pages Posted: 11 Aug 2014 Last revised: 23 Jun 2017

See all articles by Janet Gao

Janet Gao

McDonough School of Business

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management; Reichman University - Interdisciplinary Center (IDC) Herzliyah; European Corporate Governance Institute (ECGI)

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: June 21, 2017

Abstract

We study the effect of systematic uncertainty on firms' precautionary saving motives. As systematic uncertainty changes firms' operational and investment policies, its implications on firm cash holdings remain unclear. Using a GARCH-model based methodology, we construct novel, forward-looking measures of firms' exposure to systematic uncertainty through firms' future cash needs and their costs of external financing. We find that systematic uncertainty increases firm cash holdings through both channels. Moreover, firms with cyclical access to external financing are more affected by systematic uncertainty through the cost-of-capital channel, while firms with unstable cash flows are more affected through the cash-needs channel.

Keywords: Cash holdings, systematic uncertainty, precautionary saving

JEL Classification: G30, G32, D8, E32

Suggested Citation

Gao, Janet and Grinstein, Yaniv and Grinstein, Yaniv and Wang, Wenyu, Cash Holdings, Precautionary Motives, and Systematic Uncertainty (June 21, 2017). Available at SSRN: https://ssrn.com/abstract=2478349 or http://dx.doi.org/10.2139/ssrn.2478349

Janet Gao (Contact Author)

McDonough School of Business ( email )

Washington, DC 20057
United States

Yaniv Grinstein

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Sage Hall
Ithaca, NY 14853
United States
607-255-8686 (Phone)
607-254-4590 (Fax)

Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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