The Effects of Cash-Holding Motivation on Cash Management Dynamics

Document Type

Peer-Reviewed Article

Publication Date



The two main motivations for having precautionary cash holdings are to cover potential operating losses and to fund investments. A firm’s cash-holding levels may appear to be similar under these two motivations; however, a firm’s cash-management dynamics can vary significantly depending on which of the two motivations is dominant. In this study, we investigate cash-adjustment speed when the actual cash levels deviate from the target cash levels. We confirm that, in general, cash-adjustment speed is faster when actual cash levels are above the target than when they are below the target; however, we also find that this speed asymmetry is more significant for firms with high operating-loss-driven (OLD) holdings than for firms with investment-driven (ID) holdings. In addition, we find that firms with high ID holdings adjust cash faster than firms with low ID holdings, regardless of cash-adjustment direction. These differences in speed imply that firms’ use of external capital can play a major role in their cash adjustment. High OLD firms are less likely than low OLD firms to use external capital to adjust cash levels up. This pattern stands in stark contrast to the pattern characterizing firms with different ID holdings, as high ID firms are more likely than low ID firms to use external capital, especially equity, to adjust cash levels up. We propose, therefore, that cash-holding motivation affects cash-management dynamics.