companies.Cashbalancesshouldalsodecreasewith
anincreaseinthefinancialchoicesthatfirmshaveto
raisecapital.Thus,thecapacityto accesscorporate
bondmarketsin additiontoconventionalbanks for
debtshouldallownonfinancialcorporationstoreduce
their cash balances.
8- Informationasymmetryaboutinvestments.Firmswill
generallyfacefarmoredifficultyraisingcapitalata
fair price for investments where externalinvestors
havelessinformationaboutthepotentialpayoffsthan
the firm does.
9 Thus,wewouldexpectfirmstoacquirelargercash
balancesinbusinesseswhereprojectsaredifficultto
assess and monitor. This may explain why cash
holdings tend to be higher in firms that have
substantialR&Dinvestments;bothlendersandequity
investorsfacedifficultiesinevaluatingthepossibility
of success with these investments.
Strategic Cash Holdings
Insomecases, companiesholdcash notbecausetheyhave
specificinvestmentsinmindthattheywanttofinancewith
thecashbutjustincase.“Justincaseofwhat?”youmight
ask.Thesecompaniesviewcashasa strategicweapon that
they can use to take advantage of opportunities that may
manifest in the future.Of course, these opportunities may
never show up but it would still be rational for firms to
accumulate cash. In fact, the advantageof having cash is
greatestwhencashisascarceresourceandcapitalmarkets
aredifficulttoaccessorclosed.Inmanyemergingmarkets,
forinstance,companiesholdhugecashbalancesandusethe