- Entrepreneurial Vision, Information, and Cash
- Number of pages
- Amsterdam: University of Amsterdam
- Document type
- Working paper
- Interfacultary Research Institutes
Faculty of Economics and Business (FEB)
- Amsterdam Center for Law & Economics (ACLE)
Amsterdam Business School Research Institute (ABS-RI)
We analyze when entrepreneurial firms hoard more cash and when instead they raise more external financing to co-finance new investments. Our simple dynamic model focuses on differences in vision between the firm's manager and financiers: they may disagree about the attractiveness of new investment opportunities. We show that firms with better investment opportunities hoard less cash - thereby delaying investment less - and they raise more external financing. Having stronger cash flows, these firms might, thus, have larger cash holdings as they mature despite pursuing a low-cash strategy in their growth phase. Furthermore, private firms hoard less cash than public firms, as do firms with higher debt capacity. Crucially, none of these predictions can be obtained in the standard setting focusing on information asymmetry or private benefits. Several extensions are discussed.
- February 3, 2014
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