Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies

Viral V. Acharya, Heitor Almeida, Murillo Campello

NBER Working Paper No. 11391
Issued in June 2005
NBER Program(s):Corporate Finance

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.

download in pdf format
   (675 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11391

Published: Acharya, Viral V. & Almeida, Heitor & Campello, Murillo, 2007. "Is cash negative debt? A hedging perspective on corporate financial policies," Journal of Financial Intermediation, Elsevier, vol. 16(4), pages 515-554, October. citation courtesy of

Users who downloaded this paper also downloaded* these:
Opler, Pinkowitz, Stulz, and Williamson w6234 The Determinants and Implications of Corporate Cash Holdings
Fazzari, Hubbard, and Petersen w2387 Financing Constraints and Corporate Investment
Bates, Kahle, and Stulz w12534 Why Do U.S. Firms Hold So Much More Cash Than They Used To?
Foley, Hartzell, Titman, and Twite w12649 Why do firms hold so much cash? A tax-based explanation
Myers and Majluf w1396 Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us