Abstract. Previous literature on cash management has revealed that cash holdings are treated like an insurance policy against liquidity shocks that limit future profitable investments. In a theoretical model based on this finding, we analyze how investors' attitude towards uncertain investment returns affects the valuation of cash and the amount of cash holdings. Consequently, we show empirically in a panel analysis that cash holdings indeed become less valuable with increasing ambiguity aversion. In line with the other studies from the catering literature, we also demonstrate that managers react accordingly and lower cash holdings if their investors are ambiguity averse. With several robustness tests we also address potential doubts concerning the quality of our data and analyze further implications of our theory.
JEL Classification: A12, D03, G35, Z10Keywords: Ambiguity aversion, behavioral decision theory, cash policy, corporate finance.
Ambiguity Aversion and Cash Holdings 05/08/2013Abstract. Previous literature on cash management has revealed that cash holdings are treated like an insurance policy against liquidity shocks that limit future profitable investments. In a theoretical model based on this finding, we analyze how investors' attitude towards uncertain investment returns affects the valuation of cash and the amount of cash holdings. Consequently, we show empirically in a panel analysis that cash holdings indeed become less valuable with increasing ambiguity aversion. In line with the other studies from the catering literature, we also demonstrate that managers react accordingly and lower cash holdings if their investors are ambiguity averse. With several robustness tests we also address potential doubts concerning the quality of our data and analyze further implications of our theory.JEL Classification: A12, D03, G35, Z10
For varying borrowing and lending amounts, the corresponding subjective discount rates will also vary. A situation where high amounts correspond to lower discount rates is called a conventional magnitude effect, while the opposite is called a reverse magnitude effect. We present an overview of the theoretical arguments for both kinds of magnitude effects. Against this background, we then offer the first comprehensive empirical analysis of this issue based on real-life transaction data. To do so, we rely on more than 9,000 credit applications from the formerly largest German peer-to-peer (P2P) lending platform, Smava, between February 2007 and April 2013. We confirm that there is a conventional magnitude effect for lending money to others but a reverse magnitude effect for borrowing decisions. We suggest, as an explanation for our findings, the prevalence of cost-based determinants of magnitude effects in this special setting.
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