Working Paper: CEPR ID: DP15059
Authors: Viral V. Acharya; Soku Byoun; Zhaoxia Xu
Abstract: We theoretically and empirically show that in the presence of a time-varying cost of capital(COC), fi rms save from external capital when the firm-specifi c COC is low to hedge againstthe risk of underinvestment due to a higher COC in the future. This hedging motive drivesthe sensitivity of cash saving to the COC in both fi nancially constrained and currently unconstrainedfirms. This sensitivity is especially pronounced among firms that tend to face ahigher COC when in need of external fi nance. These firms with high hedging motives issueexcess capital to save cash when the COC is lower. Such cash saving behavior is influenced byfuture investments.
Keywords: Hedging; Precautionary Motive; Market Timing; Financial Constraint
JEL Codes: G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| cost of capital (CoC) (G31) | cash savings (D14) |
| lower cost of capital (CoC) (G32) | increased cash savings (D14) |
| lower cost of capital (CoC) (G32) | cash savings for financially constrained firms (G32) |
| lower cost of capital (CoC) (G32) | cash savings for unconstrained firms (D25) |
| high hedging motives (G41) | increased cash savings when CoC is low (G33) |
| monetary policy shocks (E39) | changes in CoC (C10) |
| contractionary monetary policy (E52) | cash savings (D14) |