Future Capital
Investments If capital markets were efficient and always
accessiblewithnotransactionscosts,firmscouldraisefresh
capitalwhenneededtoinvestinnewprojectsorinvestments.
Inthereal world,firms oftenfaceconstraintsand costsin
accessing capital markets. Some of the constraints are
internallyimposed(bymanagement)butmanyareexternal,
andtheyrestrictafirm’scapacitytoraisefreshcapitaltofund
evengoodinvestments.Inthefaceoftheseconstraints,firms
willsetasidecashtocoverfutureinvestmentneeds;ifthey
failtodoso,theyruntheriskofturningawayworthwhile
investments.Wewouldexpectthispartofthecashbalanceto
be a function of the following variables:
- Magnitude of and uncertainty about future
investments.Theneedtoholdcashwillbegreatestin
firmsthathavebothsubstantialexpectedinvestment
needs andhigh uncertaintyaboutthe magnitudeof
these needs. After all, firms that have large but
predictable investment needs can line up external
funding well in advance of their needs, and firms
with smallinvestment needs cangetaway without
setting aside substantial cash balances.
7 - Accesstocapitalmarkets.Firmsthathaveeasierand
cheaperaccesstocapitalmarketsshouldretain less
cashforfutureinvestmentneedsthanfirmswithout
thisaccess.Thus,wewouldexpectcashbalancesto
be higher (in proportional terms) in smaller
companiesthaninlargerones,inprivatebusinesses
thaninpubliclytradedfirmsandinemergingmarket
companies as opposed to developed market