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A theory of operational cash holding, endogenous financial constraints, and credit rationing

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  • Gerhard Kling

Abstract

This paper develops a theory of operational cash holding. Liquidity shocks due to delayed payments must be financed using cash or short-term debt. Debt holders provide an irrevocable credit line given a firm's expected insolvency risk, and equity holders select optimum cash holding. The model demonstrates the trade-off between cash holding and investing in fixed assets. Introducing uncertain cash flows leads to precautionary cash holding if debt holders impose financial constraints. Precautionary cash holding, in turn, reduces insolvency risk enhancing access to short-term finance. The theory shows that credit rationing can occur in the absence of market frictions. Using U.S. data from 1998 to 2012, empirical findings suggest that the decline in credit lines has contributed to the increase in cash holding in line with theoretical predictions.

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  • Gerhard Kling, 2018. "A theory of operational cash holding, endogenous financial constraints, and credit rationing," The European Journal of Finance, Taylor & Francis Journals, vol. 24(1), pages 59-75, January.
    • Handle: RePEc:taf:eurjfi:v:24:y:2018:i:1:p:59-75
    DOI: 10.1080/1351847X.2016.1225590
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    Citations

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    Cited by:

    1. Kling, Gerhard, 2021. "Measuring financial exclusion of firms," Finance Research Letters, Elsevier, vol. 39(C).
    2. Mateut, Simona & Chevapatrakul, Thanaset, 2018. "Customer financing, bargaining power and trade credit uptake," International Review of Financial Analysis, Elsevier, vol. 59(C), pages 147-162.
    3. Zhongchao Wang & Shaoni Zhou & Yuping Zhou & Hao Yang, 2024. "The impact of CEOs' early‐life experience on the financialization of non‐financial firms: Evidence from the great Chinese famine," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(2), pages 1609-1626, April.
    4. Mattia Iotti & Giuseppe Bonazzi, 2023. "Financial Sustainability in Agri-Food Companies: The Case of Members of the PDO Parma Ham Consortium," Sustainability, MDPI, vol. 15(5), pages 1-31, February.
    5. Alomran, Abdulaziz Ahmed & Alsubaiei, Bader Jawid, 2022. "Oil price uncertainty and corporate cash holdings: Global evidence," International Review of Financial Analysis, Elsevier, vol. 81(C).
    6. Tang, Ying & Moro, Andrea, 2020. "Trade credit in China: Exploring the link between short term debt and payables," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    7. Machokoto, Michael & Mahonye, Nyasha & Makate, Marshall, 2022. "Short-term financing sources in Africa: Substitutes or complements?," Research in International Business and Finance, Elsevier, vol. 60(C).
    8. Xu, Xingmei & Xuan, Chao, 2021. "A study on the motivation of financialization in emerging markets: The case of Chinese nonfinancial corporations," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 606-623.
    9. Kling, Gerhard & Volz, Ulrich & Murinde, Victor & Ayas, Sibel, 2021. "The impact of climate vulnerability on firms’ cost of capital and access to finance," World Development, Elsevier, vol. 137(C).
    10. Rahman, Molla Ramizur & Misra, Arun Kumar & Kumar, Satish, 2024. "A financial supply chain on corporate working capital and interbank lines of credit," International Review of Financial Analysis, Elsevier, vol. 91(C).

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