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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.

The Impact of Competition and Time-to-Finance on Corporate Cash Holdings