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Why Do Firms Sit on Cash? An Asymmetric Information Approach

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  • Milton Harris
  • Artur Raviv

Abstract

In this paper, we build a simple formal model of cash holdings that can explain this and other empirical regularities. Our model is based on the well-known “lemons” problem associated with equity issuance. We show that firms with poor growth opportunities and those with excellent opportunities will not hold excess cash, whereas firms with opportunities in the middle range will hold excess cash. We derive empirical implications relating excess cash to the extent of asymmetric information, growth opportunities, value of assets in place, and cash holding costs.

Suggested Citation

  • Milton Harris & Artur Raviv, 2017. "Why Do Firms Sit on Cash? An Asymmetric Information Approach," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 6(2), pages 141-173.
    • Handle: RePEc:oup:rcorpf:v:6:y:2017:i:2:p:141-173.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfx017
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    References listed on IDEAS

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    2. Maurizio Rocca & Raffaele Staglianò & Tiziana Rocca & Alfio Cariola & Ekaterina Skatova, 2019. "Cash holdings and SME performance in Europe: the role of firm-specific and macroeconomic moderators," Small Business Economics, Springer, vol. 53(4), pages 1051-1078, December.
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    5. Loncan, Tiago, 2020. "Foreign institutional ownership and corporate cash holdings: Evidence from emerging economies," International Review of Financial Analysis, Elsevier, vol. 71(C).

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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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