Non-Precautionary Cash Hoarding and the Evolution of Growth Firms

The starting point of our paper is the question: Should a growth firm hoard cash to reduce dilution associated with external financing (by self-financing more) if this means delaying its existing investment opportunity? The analysis of such non-precautionary hoarding gives a stark contrast to the better-known precautionary motive that focuses on hoarding cash in anticipation of the arrival of potential investment opportunities. The latter particularly applies to large and mature firms. Our perspective is that of a growth firm with investment opportunities already present but without the necessary cash to undertake these opportunities; arguably one of the most important settings in corporate finance. While from a precautionary perspective, firms expecting the arrival of better opportunities hoard more, we have the opposite prediction for growth firms for which investment opportunities are already present. Such non-precautionary hoarding features a self-reinforcing effect: firms with better investment opportunities hoard less, yet grow successful and cash-rich more quickly. We show that hoarding affects the choice between public and private financing, and is sensitive to product market competition. Our contrasting insights to those from precautionary theories can help explain puzzling empirical evidence, such as why private firms hoard less than public firms, and why competition drives some firms to prefer hoarding and public financing, while others to prefer the opposite.