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Precautionary Saving in a Financially Constrained Firm

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  • Andrew B Abel
  • Stavros Panageas

Abstract

For a firm that cannot raise external funds, cash on hand serves as precautionary saving. We derive a closed-form expression for the target level of cash on hand in the presence of persistent cash flows. Contrary to conventional wisdom, a mean-preserving increase in the volatility of cash flow can decrease this target. Over the set of admissible parameter values, the average impact of volatility on the target is zero. Endogenous selection, reflecting termination of firms that run out of cash, leads to a positive average impact of volatility on the target level of cash, consistent with empirical findings.

Suggested Citation

  • Andrew B Abel & Stavros Panageas, 2023. "Precautionary Saving in a Financially Constrained Firm," The Review of Financial Studies, Society for Financial Studies, vol. 36(7), pages 2878-2921.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:7:p:2878-2921.
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    Cited by:

    1. Patrick Bolton & Ye Li & Neng Wang & Jinqiang Yang, 2020. "Dynamic Banking and the Value of Deposits," NBER Working Papers 28298, National Bureau of Economic Research, Inc.
    2. Brianti, Marco, 2021. "Financial Shocks, Uncertainty Shocks, and Monetary Policy Trade-Offs," Working Papers 2021-5, University of Alberta, Department of Economics.
    3. Strauss, Ilan & Yang, Jangho, 2020. "Corporate Secular Stagnation: Empirical Evidence on the Advanced Economy Investment Slowdown," INET Oxford Working Papers 2019-16, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.

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    More about this item

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

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