Thesecondreasonforholdingcashistocoverunanticipated
expensesortomeetunspecifiedcontingencies.Forexample,
cyclicalfirmswillaccumulatecashduringeconomicbooms
anddrawon thatcashintheeventofa recessionto cover
operatingdeficits.Ingeneral,therefore,wewouldexpectthis
component of the cash balance to be a function of the
following variables:
- Volatilityintheeconomy.Firmsshouldaccumulate
morecash,otherthingsremainingequal,inunstable
and volatile economies than they do in mature
economies.Thereisafargreaterlikelihoodofshocks
in the former and thus a much higher need for cash.
5 - Volatilityin operations.Inany giveneconomy, we
wouldexpectfirmswithmorevolatileoperatingcash
flows to hold higher cash balances to meet
contingencies than firms with stable cash flows.
Technology companies often have large cash
balances precisely because they are so uncertain
about their future earnings. - Competitive environment. One factor that adds to
instabilityisthepresenceofstrongcompetitioninthe
businessinwhichafirmoperates.Wewouldexpect
firms that operate in more intensely competitive
sectors to hold more cash than otherwise similar
firms that are protected from competition.
6 - Financial leverage. A firm that has a higher debt
ratio, for any given operating cash flow, has
committeditselftomakinghigherinterestpayments
in thefuture. Concerns about being able to make
these payments should lead to higher cash balances.