Dynamic Decision-making Of Corporate Cash Savings And Financial Constraints

This paper is aimed to understand firms' cash saving behavior under different financial status. Our dynamic model, in which firms can use three financial tools: own cash, bond, and stock market, shows that financially constrained firms use their own cash to smooth dividend and investment, while unconstrained firms may raise bond. The numerical solution of the model and the Monte Carlo experiment show that the cash holdings of constrained firms are positively correlated with cash flows and negatively with firm values. The empirical analysis using datasets of U.S. and China corporations support supports the model implications.