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http://hdl.handle.net/2451/26566
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| Title: | Is Cash Negative Debt?A Hedging Perspective on Corporate Financial Policies |
| Authors: | Acharya, Viral V.
Almeida, Heitor
Campello, Murillo |
| Issue Date: | 27-Dec-2004 |
| Series/Report no.: | FIN-04-036 |
| Abstract: | We model the interplay between cash and debt policies in the presence of
financial constraints. While saving cash allows constrained firms to
hedge against future cash flow shortfalls, reducing current debt –
“saving borrowing capacity” – is a more effective way
of securing investment in high cash flow states. This trade-off implies
that constrained firms will allocate cash flows into cash holdings if
their hedging needs are high (i.e., if the correlation between operating
cash flows and investment opportunities is low). Those same firms,
however, will use free cash flows to reduce current debt if their
hedging needs are low. The empirical examination of debt and cash
policies of a large sample of firms reveals evidence that is consistent
with our theory. In particular, our evidence shows that financially
constrained firms with high hedging needs have a strong propensity to
save cash out of cash flows while leaving their debt positions
unchanged. In contrast, constrained firms with low hedging needs direct
most of their free cash flows towards debt reduction, as opposed to cash
savings. Our analysis points to an important hedging motive behind
standard financial policies such as cash and debt management. It
suggests that cash should not be viewed as negative debt. |
| URI: | http://hdl.handle.net/2451/26566 |
| Appears in Collections: | Finance Working Papers
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