Working Paper: NBER ID: w27517
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), firms save from external capital when the firm-specific COC is low to hedge against the risk of underinvestment due to a higher COC in the future. This hedging motive drives the sensitivity of cash saving to the COC in both financially constrained and currently unconstrained firms. This sensitivity is especially pronounced among firms that tend to face a higher COC when in need of external finance. These firms with high hedging motives issue excess capital to save cash when the COC is lower. Such cash saving behavior is influenced by future investments.
Keywords: cash savings; cost of capital; hedging motive; external finance
JEL Codes: G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower coc (C10) | increased cash savings (D14) |
| lower coc (C10) | excess capital issuance (G32) |
| higher future investments (G31) | increased cash savings sensitivity to coc (E21) |
| hedging motive (G41) | sensitivity of cash saving to coc (C10) |
| Reg FD shock (G18) | decline in coc (P13) |
| contractionary monetary policy shock (E49) | higher coc (D29) |