Market Frictions And Ability To Invest: A Cash Holding Policy Perspective

This paper is an original attempt to systematically analyse the effects of different cash holding policies on corporate investment decisions. In a dynamic framework, where firms have both present and future investment opportunities, corporate cash holding may enable companies to secure their ability to invest in presence of market frictions. The authors distinguish two groups of companies that differ for their liquidity position relative to the estimated target cash. They provide out-of-sample evidence for a large sample of UK nonfinancial listed firms that complements previous studies in this area using US data.