What determines the composition of a firm's cash reserves?

Laura Cardella, Douglas Fairhurst, Sandy Klasa

Research output: Contribution to journalArticlepeer-review

Abstract

We investigate what determines variation in the composition of the financial assets that constitute corporate cash reserves and how this variation relates to other key liquidity management practices. The degree to which a firm invests its cash reserves in less liquid, longer-maturity financial assets that earn a higher yield is explained by financial constraints, the ability to accurately forecast short-term liquidity needs, and the firm's likelihood of defaulting on its debt. During years when a firm's cash reserves are required to fund increases in investment or operating expenses the firm transfers funds from less liquid to more liquid financial assets. A firm's decisions relating to the composition of its cash reserves interacts with other key liquidity management practices, such as relying on credit lines for liquidity, extending trade credit or using it as a source of financing, and holding large amounts of inventories. Our findings provide insights on an important component of corporate liquidity management decisions.

Original languageEnglish (US)
Article number101924
JournalJournal of Corporate Finance
Volume68
DOIs
StatePublished - Jun 2021

Keywords

  • Cash holdings
  • Credit lines
  • Inventories
  • Trade credit

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Fingerprint

Dive into the research topics of 'What determines the composition of a firm's cash reserves?'. Together they form a unique fingerprint.

Cite this