Abstract
We study why companies hold cash by exploring shifts in demand induced by demographics. These shifts generate exogenous variations both on the precautionary motive and the free cash problem. We find that firms increase their cash holdings in advance of high demand growth. Consistent with the precautionary motive, this relation is stronger for financially constrained firms. Additionally, we find that firms decrease their cash holdings when facing low forecasted demand growth. Consistent with an adjustment to reduce the free cash problem this relation is stronger for firms with stronger governance, lower debt, and in low concentration industries.
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