The Review of Corporate Finance Studies Vol. 6 No. 2 2017
Why Do Firms Sit on Cash? An Asymmetric Information Approach
Abstract
In this paper, we build a simple formal model of cash holdings that can explain this and other empirical regularities. Our model is based on the well-known âlemonsâ problem associated with equity issuance. We show that firms with poor growth opportunities and those with excellent opportunities will not hold excess cash, whereas firms with opportunities in the middle range will hold excess cash. We derive empirical implications relating excess cash to the extent of asymmetric information, growth opportunities, value of assets in place, and cash holding costs. Received March 29, 2017; editorial decision June 12, 2017 by Editor Uday Rajan.
- DOI
- 10.1093/rcfs/cfx017
- Volume
- 6
- Issue
- 2
- Pages
- 141-173
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref