NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Soku Byoun

Hankamer School of Business
Baylor University
One Bear Place #98004
Waco, TX 76798
USA

E-Mail: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org
Institutional Affiliation: Baylor University

NBER Working Papers and Publications

July 2020The Sensitivity of Cash Savings to the Cost of Capital
with Viral V. Acharya, Zhaoxia Xu: w27517
We show theoretically and empirically that in the presence of a time-varying cost of capital (COC), firms have a hedging motive to reduce the overall COC over time by saving cash when COC is relatively low. The sensitivity of cash savings to COC is especially pronounced with respect to the cost of equity and for firms with greater correlation between COC and financing needs for future investments. Both financially constrained and unconstrained firms respond to low COC by saving cash out of external capital issuance in excess of current financial needs.
 
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