“Cash Holding Adjustments and Firm Entrenchment ” by Erik Lie
University of Iowa
State University of New York at Buffalo,
We find that, on average, firms close 31% of their gaps between target and actual cash ratios in each year. This adjustment speed is generally swifter if the actual cash ratio exceeds the target ratio, possibly because it is cheaper to disgorge than to raise cash. But as firms become more entrenched, they decelerate their cash adjustment significantly if the actual cash ratio exceeds the target ratio, such that the adjustment speed is slower at high cash levels. We interpret this as evidence that self-interested managers are reluctant to disburse excess cash, and will allow cash levels to remain high unless they are subject to external pressure.