Why do firms sit on cash? An Asymmetric Information Approach, The Review of Corporate Finance Studies

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 “lemons” 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.

Type

Article

Author(s)

Artur Raviv, Milton Harris

Date Published

2017

Citations

Raviv, Artur, and Milton Harris. 2017. Why do firms sit on cash? An Asymmetric Information Approach. The Review of Corporate Finance Studies. 6(2): 141-173.

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