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Publication Cyclicality of growth opportunities and the value of cash holdings

Type

Working Paper

Institution(s)

University of Hamburg

Year

2016

Author(s)

Meike Ahrends
Wolfgang Drobetz
Tatjana Xenia Puhan

Research Area

Corporate Finance

Keywords

Business cycle, cash holdings, value of cash, growth opportunities

Abstract

This paper shows that business cycle dynamics and, in particular, the cyclicality of a firm’s growth opportunities, are important determinants of the value of corporate cash holdings. We find that cash is more valuable for firms with relatively more attractive growth opportunities in bad states of the busi-ness cycle. Cash holdings provide the financial flexibility to invest even in times when capital supply is relatively scarce. This valuation effect is strongest for firms with low financial leverage and high R&D spending. For firms, where changes in cash holdings exert a stronger effect on stock returns, cash holdings also have a stronger relation with net investment and operating performance.

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