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1、FinancialConstraints,Investment,andtheValueofCashHoldingsDavidJ.DenisKrannertGraduateSchoolofManagement,PurdueUniversityValeriySibilkovSheldonB.LubarSchoolofBusiness,UniversityofWisconsinDownloadedfromPreviousstudiesreportthatcashholdingsaremorevaluableforfinanciallyconstrainedfirmsthanforunconstrain
2、edfirms.Weexamine(i)whythisissoand(ii)whysomeconstrainedfirmsappeartoholdtoolittlecash.Ourresultsindicatethatgreatercashholdingsareassociatedwithhigherlevelsofinvestmentforconstrainedfirmswithhighhedgingneedsandthattheassociationbetweeninvestmentandvalueisstrongerforconstrainedfirmsthanforunconstrained
3、firms.Thesefindingsimplythathighercashholdingsallowconstrainedhttp://rfs.oxfordjournals.org/firmstoundertakevalue-increasingprojectsthatmightotherwisebebypassed.Wefurtherfindthatsomeconstrainedfirmsexhibitlowcashholdingsbecauseofpersistentlylowcashflows.Overall,ourfindingssupporttheviewthatgreatercashhold
4、ingsofconstrainedfirmsareavalue-increasingresponsetocostlyexternalfinancing.(JELG32,G35)ModiglianiandMiller(1958)arguethatinafrictionlessenvironment,compa-niescanfundallvalue-increasinginvestmentopportunities.Thatis,investmentandgrowthdonotdependontheavailabilityofinternalcapital.OncecapitalatNanjing
5、UniversityonApril29,2013marketimperfectionsareintroduced,however,firmsarenotnecessarilyabletopursueallvalue-increasinginvestmentopportunities.Forexample,inthemod-elsofGreenwald,Stiglitz,andWeiss(1984)andMyersandMajluf(1984),capitalmarketfrictionsincreasethecostofoutsidecapitalrelativetointernallygen
6、eratedfunds.Consequently,somefirmsthathaveattractivegrowthoppor-tunitiesinvestlessthanthefirst-bestoptimum,leadingtolowerfuturegrowthandreducedoperatingperformanceandfirmvalue.Onewaytomitigatetheseadverseeffectsisforfirmswithhighcostsofexternalfinance(i.e.,financiallyconstrainedfirms)torelymoreoninternalfi
7、nancialresources:cashflowandcashholdings.Cashholdingscanbevaluablewhenothersourcesoffunds,includingcashflows,areinsufficienttosatisfyfirms’demandforcapital.1Thatis,firmsfacingWeappreciatehelpfulcommentsreceivedf
