Is cash negative debt?: a hedging perspective on corporate financial policies

Acharya, V, Almeida, H and Campello, M (2005) Is cash negative debt?: a hedging perspective on corporate financial policies. Working Paper. London Business School nan.

Abstract

We model the interplay between cash and debt policies in the presence of ficial constraints. While saving cash allows ficially constrained firms to hedge against future income shortfalls, reducing debt "saving borrowing capacity" is a more effective way of securing future investment in high cash flow states. This tradeoff implies that constrained firms will allocate excess cash flows into cash holdings if their hedging needs are high (i.e., if the correlation between operating cash flows and investment opportunities is low). However, constrained firms will use excess cash flows to reduce current debt if their hedging needs are low. The empirical examination of cash and debt policies of a large sample of constrained and unconstrained firms reveals evidence that is consistent with our theory. In particular, our evidence shows that ficially constrained firms with high hedging needs have a strong propensity to save cash out of cash flows, while showing no propensity to reduce outstanding debt. In constrast, constrained firms with low hedging needs systematically channel free cash flows towards debt reduction, as opposed to cash savings. Our analysis points to an important hedging motive behind standard ficial policies such as cash and debt management. It suggests that cash should not be viewed as negative debt.