Investigating the effect of firm's bankruptcy risk and stock return's systematic and idiosyncratic volatilities on cash holding

The managers have different incentives to keep cash in firms. One of their incentives for cash holding is precautionary motives. Based on precautionary motives، and to deal with unexpected financial crisis and the subsequent uncertainties، firms always keep a part of their assets in cash type. This research investigates the relationship between two measures of firm’s future uncertainties includes 1) stock return’s total volatilities and its systematic (normal) and idiosyncratic (abnormal) components، and 2) bankruptcy risk، with cash holding in 193 firms listed in Tehran Stock Exchange from 2002 to 2013. The results show that the increase in stock return volatilities (especially idiosyncratic volatilities) and also increase in bankruptcy risk، lead to increase in firms’ cash holding. The research findings are consistent with the concepts of the static trade-off theory.