We introduce a liquidity constraint to the standard model of a firm with stochastic cash flow and an irreversible exit decision. A firm with no cash holdings and negative cash flow is forced to exit regardless of its option value. This creates a precautionary motive for holding cash, which has a...

We introduce a post-entry liquidity constraint to the standard real option model of a firm with stochastic cash flow and an irreversible exit decision. We assume that a firm with no cash holdings and negative cash flow is forced to exit regardless of its future prospects. This creates a...