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- Publisher
- Oxford University Press
- Copyright
- © The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.
- Subject
- Article
- ISSN
- 0893-9454
- eISSN
- 1465-7368
- DOI
- 10.1093/rfs/hhp031
- Publisher site
- See Article on Publisher Site
Abstract
Previous studies report that cash holdings are more valuable for financially constrained firms than for unconstrained firms. We examine (i) why this is so and (ii) why some constrained firms appear to hold too little cash. Our results indicate that greater cash holdings are associated with higher levels of investment for constrained firms with high hedging needs and that the association between investment and value is stronger for constrained firms than for unconstrained firms. These findings imply that higher cash holdings allow constrained firms to undertake value-increasing projects that might otherwise be bypassed. We further find that some constrained firms exhibit low cash holdings because of persistently low cash flows. Overall, our findings support the view that greater cash holdings of constrained firms are a value-increasing response to costly external financing.
Journal
The Review of Financial Studies – Oxford University Press
Published: Jan 2, 2010
Keywords: JEL Classification G32 G35