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The Marginal Value of Cash: Structural Estimates from a Model with Financing and Agency Frictions

Author

Listed:
  • Sudipto Dasgupta

    (Department of Finance, Chinese University of Hong Kong, Hong Kong)

  • Di Li

    (HSBC Business School, Peking University, Shenzhen City, Guangdong 518055, China)

  • Erica X. N. Li

    (Cheung Kong Graduate School of Business, Beijing 100738, China)

Abstract

How much value does an additional dollar of cash create for a firm? It is generally recognized that the marginal value of cash (MVC) can either exceed or fall below one dollar. Estimates of MVC can guide corporate cash and payout policy, indicate the quality of governance, and make a firm a target for takeover or activism. Yet the existing methods of estimation lack a rigorous theoretical foundation and often provide implausibly high or low estimates. In this paper, we provide a formulation of MVC and structurally estimate the MVC based on a model that encompasses the important determinants for the choice of cash savings, including financing and agency costs. We find that firms with large cash and capital stocks have lower marginal value of cash, whereas the relationship between leverage and marginal value of cash is hump shaped. Two quasi-natural experiments validate the MVC estimates.

Suggested Citation

  • Sudipto Dasgupta & Di Li & Erica X. N. Li, 2025. "The Marginal Value of Cash: Structural Estimates from a Model with Financing and Agency Frictions," Management Science, INFORMS, vol. 71(5), pages 3667-3687, May.
    • Handle: RePEc:inm:ormnsc:v:71:y:2025:i:5:p:3667-3687
    DOI: 10.1287/mnsc.2022.01013
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