Why do firms sit on cash? An asymmetric information approach

Milton Harris, Artur Raviv*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

16 Scopus citations


In this paper, we build a simple formal model of cash holdings that can explain this and other empirical regularities. Our model is based on the well-known “lemons” problem associated with equity issuance. We show that firms with poor growth opportunities and those with excellent opportunities will not hold excess cash, whereas firms with opportunities in the middle range will hold excess cash. We derive empirical implications relating excess cash to the extent of asymmetric information, growth opportunities, value of assets in place, and cash holding costs.

Original languageEnglish (US)
Pages (from-to)141-173
Number of pages33
JournalReview of Corporate Finance Studies
Issue number2
StatePublished - Sep 1 2017

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance
  • Business and International Management


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