Cash holdings in start-ups and founder sociodemographic characteristics

June 7, 2022

This study examines the determinants of excess cash holdings for Portuguese non-financial start-ups established between 2006 and 2009, paying particular attention to the role of founder sociodemographic and educational characteristics.

Cash is one of the most vital assets of a firm. Cash management is extremely crucial for new ventures as they often struggle to survive with very low levels of income and revenues during the first years. Moreover, start-up information is opaque to investors during their earliest years and assets are often intangible and knowledge based. Thus, founders remain the an important source of funding.

The paper finds that firms’ characteristics provide predictive power in explaining excess cash holdings. Results show that excess cash holdings are negatively associated with investment opportunities, size and liquid assets (other than cash and marketable securities). Supply side constraints lead firms to operate bellow cash optimal levels as investment opportunities increase. Additionally, as start-ups grow in size or as they own more liquid assets’ substitutes, they require less cash. In contrast, more levered start-ups (especially with short-term debt) hold more cash.

Founders’ characteristics also provide predictive power in explaining excess cash holdings. Male founders who are older and foreign hold more cash. Furthermore, multiple combinations of founders’ characteristics are associated with excess cash holdings: either lower levels of education and lack of industry experience; women with lower education; or, older and more educated founders.

The paper helps understand founder characteristics that reflect the aspects of imperfect capital markets and financial constraints –whether due to the presence of asymmetric information, imperfect commitment to repay, as well as asset tangibility– affecting cash holdings.

Click here to go to the paper by Cristina Gaio, Tiago Gonçalves, and Ana Venâncio.


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