Organization size and the optimal investment in cash
Miller & Orr (1966, Q. J. Econ., 80, 413–435) formulate a cash management model under which an organization’s cash flow evolves in terms of a stationary random walk. This, in turn, implies that the organization’s demand for cash will not grow over time. However, as organizations grow one would e...
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rr-article-94985242010-01-01T00:00:00Z Organization size and the optimal investment in cash Andrew Higson (1254978) Yoshikatsu Shinozawa (7197581) Mark Tippett (1255431) Other commerce, management, tourism and services not elsewhere classified Cash Control limits Wiener process Business and Management not elsewhere classified Miller & Orr (1966, Q. J. Econ., 80, 413–435) formulate a cash management model under which an organization’s cash flow evolves in terms of a stationary random walk. This, in turn, implies that the organization’s demand for cash will not grow over time. However, as organizations grow one would expect the demand for cash to grow as well. Given this, we formulate a cash management model under which movements in an organization’s cash balance hinge on its current rate of output or an equivalent size measure. Cash is withdrawn and invested in interest-bearing securities when the cash to output ratio becomes too high, while securities are sold and the proceeds deposited in a non-interest-bearing bank account when the cash to output ratio becomes too low. The control limits are determined so as to minimize the expected annual cost of a unit of output. Our analysis shows that when organization’s cash flows follow a non-stationary process, the optimal cash management policies are profoundly different to those obtained under the Miller & Orr (1966) model. 2010-01-01T00:00:00Z Text Journal contribution 2134/10161 https://figshare.com/articles/journal_contribution/Organization_size_and_the_optimal_investment_in_cash/9498524 CC BY-NC-ND 4.0 |
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Other commerce, management, tourism and services not elsewhere classified Cash Control limits Wiener process Business and Management not elsewhere classified |
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Other commerce, management, tourism and services not elsewhere classified Cash Control limits Wiener process Business and Management not elsewhere classified Andrew Higson Yoshikatsu Shinozawa Mark Tippett Organization size and the optimal investment in cash |
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Miller & Orr (1966, Q. J. Econ., 80, 413–435) formulate a cash management model under which an organization’s cash flow evolves in terms of a stationary random walk. This, in turn, implies that the organization’s demand for cash will not grow over time. However, as organizations grow one would expect the demand for cash to grow as well. Given this, we formulate a cash management model under which movements in an organization’s cash balance hinge on its current rate of output or an equivalent size measure. Cash is withdrawn and invested in interest-bearing securities when the cash to output ratio becomes too high, while securities are sold and the proceeds deposited in a non-interest-bearing bank account when the cash to output ratio becomes too low. The control limits are determined so as to minimize the expected annual cost of a unit of output. Our analysis shows that when organization’s cash flows follow a non-stationary process, the optimal cash management policies are profoundly different to those obtained under the Miller & Orr (1966) model. |
| format |
Default Article |
| author |
Andrew Higson Yoshikatsu Shinozawa Mark Tippett |
| author_facet |
Andrew Higson Yoshikatsu Shinozawa Mark Tippett |
| author_sort |
Andrew Higson (1254978) |
| title |
Organization size and the optimal investment in cash |
| title_short |
Organization size and the optimal investment in cash |
| title_full |
Organization size and the optimal investment in cash |
| title_fullStr |
Organization size and the optimal investment in cash |
| title_full_unstemmed |
Organization size and the optimal investment in cash |
| title_sort |
organization size and the optimal investment in cash |
| publishDate |
2010 |
| url |
https://hdl.handle.net/2134/10161 |
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1797195564895436800 |