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Do nonfinancial firms hold risky financial assets? Evidence from Germany

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  • Hoang, Daniel
  • Silbereis, Fabian
  • Stengel, Raphael

Abstract

Recent empirical evidence suggests that US industrial firms invest heavily in noncash, risky financial assets. Using hand-collected data on financial portfolios of German firms, we show that risky asset holdings are not an anomaly unique to the US. We find that industrial firms in Germany invest 11.6% of their financial assets in noncash and risky assets. Value-weighted, this percentage increases to 25.4%. While the equally-weighted average is substantial, it is clearly lower (5 percentage points or 30% in relative terms) than that in the US. After accounting for cross-country compositional differences (especially the dominance of large firms in the US technology sector), this difference in risky financial asset holdings decreases but remains at 3 percentage points. The remaining difference is driven by institutional differences that affect the relationship between firm characteristics and risky financial asset holdings in the two countries. In contrast to the US, German firms largely follow the precautionary savings motive and do not seem to misappropriate their funds when shifting them towards riskier asset allocations. Our results have implications for how asset management by nonfinancial firms should be regulated.

Suggested Citation

  • Hoang, Daniel & Silbereis, Fabian & Stengel, Raphael, 2021. "Do nonfinancial firms hold risky financial assets? Evidence from Germany," Working Paper Series in Economics 149, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    • Handle: RePEc:zbw:kitwps:149
    DOI: 10.5445/IR/1000130762
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    References listed on IDEAS

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    1. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    2. Ran Duchin & Thomas Gilbert & Jarrad Harford & Christopher Hrdlicka, 2017. "Precautionary Savings with Risky Assets: When Cash Is Not Cash," Journal of Finance, American Finance Association, vol. 72(2), pages 793-852, April.
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    More about this item

    Keywords

    Cash Policy; Financial Portfolio; Precautionary Savings; Liquidity Management;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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