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Kling, Gerhard (2018) 'A theory of operational cash holding, endogenous financial constraints, and credit rationing.' European Journal of Finance, 24 (1). pp. 59-75.

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This paper develops a theory of operational cash holding. Liquidity shocks due to delayed payments must be financed using cash or short-term debt. Debt holders provide an irrevocable credit line given a firm's expected insolvency risk, and equity holders select optimum cash holding. The model demonstrates the trade-off between cash holding and investing in fixed assets. Introducing uncertain cash-flows leads to precautionary cash holding if debt holders impose financial constraints. Precautionary cash holding, in turn, reduces insolvency risk enhancing access to short-term finance. The theory shows that credit rationing can occur in the absence of market frictions. Using U.S. data from 1998 to 2012, empirical findings suggest that the decline in credit lines has contributed to the increase in cash holding in line with theoretical predictions.

Item Type: Journal Article
Additional Information: Accepted version of a forthcoming article to be published in European Journal of Finance published by Taylor & Francis.
SOAS Departments & Centres: Departments and Subunits > School of Finance & Management
Legacy Departments > Faculty of Law and Social Sciences > School of Finance and Management
ISSN: 1351847X
DOI (Digital Object Identifier):
Date Deposited: 31 Aug 2016 11:45

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