Firm selection and corporate cash holdings |
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| Authors: | Juliane Begenau Berardino Palazzo |
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| Affiliation: | 1. Stanford Graduate School of Business & NBER & CEPR, Knight Way, E264, Stanford, CA 94305;2. Federal Reserve Board, 1801 K Street NW, Washington, DC 20036, United States;1. Carroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02467, USA;2. Swiss Finance Institute at EPFL, Quartier UNIL-Dorigny, Extranef 213, Lausanne CH-1015, Switzerland;3. Carl H. Lindner College of Business, 2906 Woodside Drive, University of Cincinnati, Cincinnati, OH 45221, USA;1. Carlson School of Management, University of Minnesota, 321 19th Avenue South, Minneapolis, MN 55455, United States;2. Nanyang Business School, Nanyang Technological University, 50 Nanyang Avenue, 639798, Singapore;1. London Business School, United Kingdom;2. Copenhagen Business School, Denmark;1. Purdue University, Krannert School of Management, 403W. State Street, West Lafayette, IN 47907, United States;2. Asian Bureau of Finance and Economics Research, NUS Business School, BIZ 2 Storey 4, #04-05 1 Business Link 117592, Singapore;3. European Corporate Governance Institute, c/o the Royal Academies of Belgium, Palace of the Academies, Rue Ducale 1 Hertogsstraat, 1000 Brussels, Belgium;4. National Bureau of Economic Research, 1050 Massachusetts Ave, Cambridge MA 02138, United States;5. University of Alberta, Alberta School of Business, 4-20K Business Building, Edmonton, AB T6G 2R6, Canada |
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| Abstract: | Since the early 1980s, the composition of US public firms has progressively shifted toward less profitable firms with high growth potential (Fama and French, 2004). We estimate a dynamic corporate finance model to quantify the role of this selection mechanism for the secular trend in cash holdings among US public firms. We find that an increase in the precautionary savings motive—primarily driven by the decline in initial profitability among R&D-intensive new lists—explains about 50% of the upward trend in cash holdings. This selection mechanism also explains part of the upward trend in sales growth volatility. |
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