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Optimal cash holdings under heterogeneous beliefs

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  • Robert Jarrow
  • Andrey Krishenik
  • Andreea Minca

Abstract

This paper explores a one†period model for a firm that finances its operations through debt provided by heterogeneous creditors. Creditors differ in their beliefs about the firm's investment outcomes. We show the existence of Stackelberg equilibria in which the firm holds cash reserves in order to provide incentives for pessimistic creditors to invest in the firm. We find interest rates and cash holdings to be complementary tools for increasing debt capacity. In markets with a high concentration of capital across a small interval of pessimistic creditors or by a few large creditors, cash holdings is the preferred tool to increase the debt capacity of the firm.

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  • Robert Jarrow & Andrey Krishenik & Andreea Minca, 2018. "Optimal cash holdings under heterogeneous beliefs," Mathematical Finance, Wiley Blackwell, vol. 28(2), pages 712-747, April.
    • Handle: RePEc:bla:mathfi:v:28:y:2018:i:2:p:712-747
    DOI: 10.1111/mafi.12148
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    Cited by:

    1. Tang, Ning & Kamar, Amina & Lin, Chih-Yung & Lu, Chien-Lin, 2023. "Bank safety-oriented culture and lending decisions," Journal of Financial Stability, Elsevier, vol. 66(C).
    2. Canil, Jean & Karpavičius, Sigitas, 2022. "Managerial risk-taking incentives and cash holding in U.S. firms: Evidence from FAS 123R," International Review of Economics & Finance, Elsevier, vol. 78(C), pages 605-628.

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