Décamps, Jean-Paul and Villeneuve, Stéphane (2019) Dynamics of cash holdings, learning about profitability, and access to the market. TSE Working Paper, n. 19-1046, Toulouse

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Abstract

We develop a dynamic model of a firm whose shareholders learn about its
long-term profitability, face costs of external financing and costs of holding cash. Cash
management policy generates a corporate life-cycle with two stages: a "probation stage"
where the firm has no access to the capital markets, pays little in dividends, increases its cash
target levels and a "mature stage" where the firm does have access to external financing,
pays dividends, decreases its cash target levels. The model provides new insights on the
corporate propensity to save and the firm's value dynamics when its profitability is difficult
to ascertain.