Abstract
In this paper we introduce time frictions in the capital market to show how industry specific competition explains the variation in corporate cash holdings. We show that time-to-finance is positively related to cash when firms are exposed to preemption risk, and that the role of cash changes with the level of preemption risk. Firms facing a high risk of preemption puts a higher value on cash for investments and a lower value on cash held for hedging illiquidity risk. Additionally, corporate cash holdings are hump-shaped in competition in the presence of time-to-finance, which reconciles some of the earlier mixed empirical findings. To do so we develop a dynamic model of investment, financing, and cash management decisions with uncertain and lumpy investment opportunities in which firms are subject to time frictions in capital markets and preemption risk.
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