Corporate Cash Holdings and Ambiguity Aversion

Previous literature on cash management has revealed that firms hoard cash to protect themselves against external financing constraints that might limit future capital budgeting policies. In a theoretical model based on this finding, we analyze how investors’ attitude toward uncertain investment returns affects the valuation of cash and the amount of cash holdings. Subsequently, we show empirically that cash holdings become less valuable with increasing ambiguity aversion in line with our model. We also demonstrate that managers react accordingly and lower cash holdings if their investors tend to be more ambiguity-averse. Several robustness tests confirm our findings.