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Expectancy balance model for cash flow

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Abstract

Economic agents try to find out the composition of different forms of assets, and the amount of each, that maximizes total wealth. The money demanded by firms is a function of the benefits and costs of holding it considering other forms of assets. The money held in cash can be remunerated by some earning asset. Even when the money is invested in bank funds or bonds, the interest rate is usually lower than the return that the firm’s business may yield. When the firm keeps idle money in cash, the firm renounces to part of its profitability, incurring in the opportunity cost of not investing in alternatives, named Holding Cost. If the firm gives preference to other assets over cash, the balance level may be insufficient for its disbursement needs. The Shortage Cost is the price of obtaining money by other means. The Expectancy Balance Model (EBM) proposed minimizes the Total Cost (combined Holding and Shortage Costs) of maintaining and transforming money from or into other forms of assets. The EBM is an instrument of cash flow decision that deals with the demand for money by firms employing the maximizing utility of total wealth (set of assets) rule.

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Authors and Affiliations

  1. University Center of Brasilia, Brasilia, Brazil

    Marcos A. S. Melo

  2. University of Brasilia, Brasilia, Brazil

    Feruccio Bilich

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  1. Marcos A. S. Melo
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  2. Feruccio Bilich
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Correspondence to Marcos A. S. Melo.

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Melo, M.A.S., Bilich, F. Expectancy balance model for cash flow. J Econ Finan 37, 240–252 (2013). https://doi.org/10.1007/s12197-011-9180-0

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  • DOI: https://doi.org/10.1007/s12197-011-9180-0

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