IDEAS home Printed from https://ideas.repec.org/a/eee/jbfina/v141y2022ics0378426622001479.html
   My bibliography  Save this article

Investment, payout, and cash management under risk and ambiguity

Author

Listed:
  • Luo, Pengfei
  • Tian, Yuan

Abstract

This study extends the theoretical model of dynamic investment, dividend payout, costly external financing, and liquidation for financially constrained firms by incorporating ambiguity. We demonstrate that ambiguity aversion induces a trade-off between the “bird-in-hand” effect and an amplified precautionary motive in determining firms’ cash management, which consequently affects firms’ investment, dividend payout, costly external financing, and liquidation decisions. Unlike the models considering risk only, we identify a non-monotonic relationship between the endogenous payout boundary and ambiguity aversion. Our model generates several new implications, including providing an explanation for the high cash holdings and speed-up of asset sales during the recent COVID-19 crisis.

Suggested Citation

  • Luo, Pengfei & Tian, Yuan, 2022. "Investment, payout, and cash management under risk and ambiguity," Journal of Banking & Finance, Elsevier, vol. 141(C).
    • Handle: RePEc:eee:jbfina:v:141:y:2022:i:c:s0378426622001479
    DOI: 10.1016/j.jbankfin.2022.106551
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426622001479
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jbankfin.2022.106551?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Lars Peter Hansen & Thomas J Sargent, 2014. "Robust Control and Model Misspecification," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 6, pages 155-216, World Scientific Publishing Co. Pte. Ltd..
    2. Wu, Yaoyao & Yang, Jinqiang & Zou, Zhentao, 2017. "Dynamic corporate investment and liquidity management under model uncertainty," Economics Letters, Elsevier, vol. 155(C), pages 9-13.
    3. repec:oup:rfinst:v:21:y:2017:i:5:p:1933-1974. is not listed on IDEAS
    4. Miao, Jianjun & Wang, Neng, 2011. "Risk, uncertainty, and option exercise," Journal of Economic Dynamics and Control, Elsevier, vol. 35(4), pages 442-461, April.
    5. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    6. Friberg, Richard & Seiler, Thomas, 2017. "Risk and ambiguity in 10-Ks: An examination of cash holding and derivatives use," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 608-631.
    7. Breuer, Wolfgang & Rieger, M. Oliver & Soypak, K. Can, 2014. "The behavioral foundations of corporate dividend policy a cross-country analysis," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 247-265.
    8. Jianjun Miao & Alejandro Rivera, 2016. "Robust Contracts in Continuous Time," Econometrica, Econometric Society, vol. 84(4), pages 1405-1440, July.
    9. Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2007. "Irreversible investment and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 136(1), pages 668-694, September.
    10. Lars Peter Hansen & Thomas J Sargent, 2014. "Three Types of Ambiguity," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 11, pages 379-430, World Scientific Publishing Co. Pte. Ltd..
    11. Gryglewicz, Sebastian & Mayer, Simon & Morellec, Erwan, 2020. "Agency conflicts and short- versus long-termism in corporate policies," Journal of Financial Economics, Elsevier, vol. 136(3), pages 718-742.
    12. Bo Liu & Hongli Wang & Jinqiang Yang, 2021. "Dynamic financing and hedging under model uncertainty," The European Journal of Finance, Taylor & Francis Journals, vol. 27(8), pages 740-751, May.
    13. Monica Neamtiu & Nemit Shroff & Hal D. White & Christopher D. Williams, 2014. "The Impact of Ambiguity on Managerial Investment and Cash Holdings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(7-8), pages 1071-1099, September.
    14. Flor, Christian Riis & Hesel, Søren, 2015. "Uncertain dynamics, correlation effects, and robust investment decisions," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 278-298.
    15. Chen, Yangyang & Dou, Paul Y. & Rhee, S. Ghon & Truong, Cameron & Veeraraghavan, Madhu, 2015. "National culture and corporate cash holdings around the world," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 1-18.
    16. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
    17. Wolfgang Breuer & Marc O. Rieger & K. Can Soypak, 2017. "Corporate Cash Holdings and Ambiguity Aversion," Review of Finance, European Finance Association, vol. 21(5), pages 1933-1974.
    18. Svetlana Orlova & Ramesh Rao & Tony Kang, 2017. "National Culture and the Valuation of Cash Holdings," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 44(1-2), pages 236-270, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Zhao, Zhiming & Wang, Shihui & Luo, Pengfei, 2024. "Optimal short-termism and liquidity management," Economics Letters, Elsevier, vol. 241(C).
    2. Zhao, Zhiming & Liu, Yuyao & Pan, Qiong, 2023. "Cash holdings, ambiguity aversion, and investment puzzles," Economics Letters, Elsevier, vol. 229(C).
    3. Wu, Kai & Lu, Yufei & Li, Donghui, 2025. "Contingent cash crunch: How do performance commitments affect acquirer liquidity?," Research in International Business and Finance, Elsevier, vol. 73(PA).
    4. Yuan, Liuchuang & Jiang, Jinglu & Mu, Congming & Chen, Tuyue, 2023. "Dynamic liquidity management with asymmetric adjustment costs," Finance Research Letters, Elsevier, vol. 58(PA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Agliardi, Elettra & Agliardi, Rossella & Spanjers, Willem, 2016. "Corporate financing decisions under ambiguity: Pecking order and liquidity policy implications," Journal of Business Research, Elsevier, vol. 69(12), pages 6012-6020.
    2. Yaoyao Wu & Jinqiang Yang & Zhentao Zou, 2018. "Ambiguity sharing and the lack of relative performance evaluation," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 66(1), pages 141-157, July.
    3. Goodell, John W. & Goyal, Abhinav & Urquhart, Andrew, 2021. "Uncertainty of uncertainty and firm cash holdings," Journal of Financial Stability, Elsevier, vol. 56(C).
    4. Shuang Li & Haijun Wang, 2023. "Robust irreversible investment strategy with ambiguity to jump and diffusion risk," International Review of Finance, International Review of Finance Ltd., vol. 23(3), pages 645-665, September.
    5. Wu, Yaoyao & Yang, Jinqiang & Zou, Zhentao, 2017. "Dynamic corporate investment and liquidity management under model uncertainty," Economics Letters, Elsevier, vol. 155(C), pages 9-13.
    6. Seokwoo Lee & Alejandro Rivera, 2021. "Extrapolation Bias and Robust Dynamic Liquidity Management," Management Science, INFORMS, vol. 67(10), pages 6421-6442, October.
    7. Li, Tongtong & Wang, Shibo & Yang, Jinqiang, 2021. "Robust consumption and portfolio choices with habit formation," Economic Modelling, Elsevier, vol. 98(C), pages 227-246.
    8. Zimper, Alexander, 2012. "Asset pricing in a Lucas fruit-tree economy with the best and worst in mind," Journal of Economic Dynamics and Control, Elsevier, vol. 36(4), pages 610-628.
    9. Wang, Yuli & Niu, Yingjie, 2020. "Ambiguity aversion for risk choice," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    10. Luis H. R. Alvarez E. & Soren Christensen, 2019. "A Class of Solvable Multidimensional Stopping Problems in the Presence of Knightian Uncertainty," Papers 1907.04046, arXiv.org.
    11. Ahrends, Meike & Drobetz, Wolfgang & Nomikos, Nikos K., 2018. "Corporate cash holdings in the shipping industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 112(C), pages 107-124.
    12. Luis H. R. Alvarez E. & Soren Christensen, 2019. "The Impact of Ambiguity on the Optimal Exercise Timing of Integral Option Contracts," Papers 1906.07533, arXiv.org.
    13. Cosmin L. Ilut & Martin Schneider, 2022. "Modeling Uncertainty as Ambiguity: a Review," NBER Working Papers 29915, National Bureau of Economic Research, Inc.
    14. Shilin Li & Jinqiang Yang & Siqi Zhao, 2022. "Robust leverage dynamics without commitment," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 74(2), pages 643-679, September.
    15. Domenico Rocco Cambrea & Andrea Calabrò & Maurizio La Rocca & Francesco Paolone, 2022. "The impact of boards of directors’ characteristics on cash holdings in uncertain times," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 26(1), pages 189-221, March.
    16. Peter G. Hansen, 2021. "New Formulations of Ambiguous Volatility with an Application to Optimal Dynamic Contracting," Papers 2101.12306, arXiv.org.
    17. Yoshioka, Hidekazu & Yaegashi, Yuta, 2019. "A finite difference scheme for variational inequalities arising in stochastic control problems with several singular control variables," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 156(C), pages 40-66.
    18. Zhao, Siqi, 2022. "Robust contracting and corporate-termism," Economics Letters, Elsevier, vol. 213(C).
    19. M. Trojanowska & P. M. Kort, 2010. "The Worst Case for Real Options," Journal of Optimization Theory and Applications, Springer, vol. 146(3), pages 709-734, September.
    20. Arnon Archankul & Giorgio Ferrari & Tobias Hellmann & Jacco J. J. Thijssen, 2023. "Singular Control in a Cash Management Model with Ambiguity," Papers 2309.12014, arXiv.org.

    More about this item

    Keywords

    Finance; Ambiguity; Cash holdings; Investment; Payout;
    All these keywords.

    JEL classification:

    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:141:y:2022:i:c:s0378426622001479. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jbf .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.