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Firm Selection and Corporate Cash Holdings

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  • Juliane Begenau
  • Berardino Palazzo

Abstract

Among stock market entrants, more firms over time are R&D–intensive with initially lower profitability but higher growth potential. This sample-selection effect determines the secular trend in U.S. public firms’ cash holdings. A stylized firm industry model allows us to analyze two competing changes to the selection mechanism: a change in industry composition and a shift toward less profitable R&D–firms. The latter is key to generating higher cash ratios at IPO, necessary for the secular increase, whereas the former mechanism amplifies this effect. The data confirm the prominent role played by selection, and corroborate the model’s predictions.

Suggested Citation

  • Juliane Begenau & Berardino Palazzo, 2017. "Firm Selection and Corporate Cash Holdings," NBER Working Papers 23249, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23249
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    Cited by:

    1. Robin Döttling & Tomislav Ladika & Enrico Perotti, 2016. "The (Self-)Funding of Intangibles," Tinbergen Institute Discussion Papers 16-093/IV, Tinbergen Institute.
    2. Ahrends, Meike & Drobetz, Wolfgang & Puhan, Tatjana Xenia, 2018. "Cyclicality of growth opportunities and the value of cash holdings," Journal of Financial Stability, Elsevier, vol. 37(C), pages 74-96.
    3. Charles W. Calomiris & Mauricio Larrain & Sergio L. Schmukler & Tomas Williams, 2019. "Search for Yield in Large International Corporate Bonds: Investor Behavior and Firm Responses," NBER Working Papers 25979, National Bureau of Economic Research, Inc.
    4. Xiao, J., 2016. "Corporate Debt Structure, Precautionary Savings, and Investment Dynamics," Cambridge Working Papers in Economics 1666, Faculty of Economics, University of Cambridge.
    5. Zhao, Jake, 2020. "Accounting for the corporate cash increase," European Economic Review, Elsevier, vol. 123(C).
    6. Favara, Giovanni & Gao, Janet & Giannetti, Mariassunta, 2021. "Uncertainty, access to debt, and firm precautionary behavior," Journal of Financial Economics, Elsevier, vol. 141(2), pages 436-453.
    7. Milton Harris & Artur Raviv, 2017. "Why Do Firms Sit on Cash? An Asymmetric Information Approach," Review of Corporate Finance Studies, Oxford University Press, vol. 6(2), pages 141-173.
    8. Demary, Markus & Hasenclever, Stefan & Hüther, Michael, 2020. "How will the COVID-19-crisis affect the trend in corporate saving?," IW-Reports 61/2020, Institut der deutschen Wirtschaft (IW) / German Economic Institute.
    9. John R. Graham & Mark T. Leary, 2017. "The Evolution of Corporate Cash," NBER Working Papers 23767, National Bureau of Economic Research, Inc.
    10. Huang, Qianqian & Jiang, Feng & Wu, Szu-Yin (Jennifer), 2018. "Does short-maturity debt discipline managers? Evidence from cash-rich firms' acquisition decisions," Journal of Corporate Finance, Elsevier, vol. 53(C), pages 133-154.
    11. Richard T. Thakor & Andrew W. Lo, 2017. "Optimal Financing for R&D-Intensive Firms," NBER Working Papers 23831, National Bureau of Economic Research, Inc.
    12. Malamud, Semyon & Zucchi, Francesca, 2019. "Liquidity, innovation, and endogenous growth," Journal of Financial Economics, Elsevier, vol. 132(2), pages 519-541.
    13. Li, Xiafei & Luo, Di, 2020. "Increase in cash holdings of U.S. firms: The role of healthcare and technology industries," Journal of Business Research, Elsevier, vol. 118(C), pages 286-298.
    14. Xiaodan Gao & Jake Zhao, . "R&D Dynamics and Corporate Cash Saving," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics.
    15. Safronov, M., 2016. "Experimentation and Learning-by-Doing," Cambridge Working Papers in Economics 1667, Faculty of Economics, University of Cambridge.
    16. John R Graham & Mark T Leary, 2018. "The Evolution of Corporate Cash," Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4288-4344.
    17. Chao He & Min Zhang, 2019. "Business Liquidity, Consumer Liquidity, and Monetary Policy," 2019 Meeting Papers 869, Society for Economic Dynamics.
    18. Ch.-M. CHEVALIER, 2018. "Financial constraints of innovative firms and sectoral growth," Documents de Travail de l'Insee - INSEE Working Papers g2018-05, Institut National de la Statistique et des Etudes Economiques.
    19. Ye Li, 2018. "Fragile New Economy: The Rise of Intangible Capital and Financial Instability," 2018 Meeting Papers 1189, Society for Economic Dynamics.
    20. Gianni La Cava & Callan Windsor, 2016. "Why Do Companies Hold Cash?," RBA Research Discussion Papers rdp2016-03, Reserve Bank of Australia.
    21. Malamud, Semyon & Zucchi, Francesca, 2016. "Liquidity, innovation, and endogenous growth," Working Paper Series 1919, European Central Bank.
    22. Sandro Brusco & Fausto Panunzi, 2018. "Internal Financing, Managerial Compensation and Multiple Tasks," Department of Economics Working Papers 18-03, Stony Brook University, Department of Economics.

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    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance

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