Precautionary Saving in a Financially-Constrained Firm

Andrew B. Abel, Stavros Panageas

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

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Year of publication:	January 2020
Authors:	Abel, Andrew B.
Other Persons:	Panageas, Stauros (contributor)
Institutions:	National Bureau of Economic Research (contributor)
Publisher:	2020: Cambridge, Mass : National Bureau of Economic Research
Subject:	Vorsichtssparen \| Precautionary saving \| Sparen \| Savings \| Theorie \| Theory \| Risiko \| Risk

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