TY - JOUR AU - Acharya,Viral V. AU - Almeida,Heitor AU - Campello,Murillo TI - Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies JF - National Bureau of Economic Research Working Paper Series VL - No. 11391 PY - 2005 Y2 - June 2005 UR - http://www.nber.org/papers/w11391 L1 - http://www.nber.org/papers/w11391.pdf N1 - Author contact info: Viral V. Acharya Stern School of Business New York University 44 West 4th Street, Suite 9-84 New York, NY 10012 Tel: 212/998-0354 Fax: 212 995 4233 E-Mail: vacharya@stern.nyu.edu Heitor Almeida University of Illinois at Urbana-Champaign 515 East Gregory Drive, 4037 BIF Champaign, IL, 61820 Tel: 217/333-2704 E-Mail: halmeida@illinois.edu Murillo Campello Johnson Graduate School of Management Cornell University 114 East Avenue 369 Sage Hall Ithaca, NY 148531-6201 Tel: 607-255-1282 E-Mail: campello@cornell.edu AB - We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows financially 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 trade-off 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 financially 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 contrast, 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 financial policies such as cash and debt management. It suggests that cash should not be viewed as negative debt. ER -