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The Macroeconomics of Firms' Savings

Author

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  • Viktoria Hnatkovska

    (University of British Columbia)

  • Roc Armenter

    (Federal Reserve Bank of Philadelphia)

Abstract

The U.S. non-financial corporate sector became a net lender vis-a-vis the rest of the economy in the early 2000s. We document this fact in the aggregate and firm-level data. We then develop a structural dynamic model with investment to study the firms' financing decisions. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity allows the firm to suspend distributions to shareholders when the cash flow is negative. Firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the large fraction of firms with net savings observed in the period 2000-2007. We also find that the rise in corporate savings over the past 40 years can be mostly attributed to a fall in the cost of equity relative to debt, driven by lower dividend taxes.

Suggested Citation

  • Viktoria Hnatkovska & Roc Armenter, 2012. "The Macroeconomics of Firms' Savings," 2012 Meeting Papers 803, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:803
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    References listed on IDEAS

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    1. François Gourio & Jianjun Miao, 2010. "Firm Heterogeneity and the Long-Run Effects of Dividend Tax Reform," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(1), pages 131-168, January.
    2. Whited, Toni M., 2006. "External finance constraints and the intertemporal pattern of intermittent investment," Journal of Financial Economics, Elsevier, vol. 81(3), pages 467-502, September.
    3. David Thesmar & Mathias Thoenig, 2011. "Contrasting Trends in Firm Volatility," American Economic Journal: Macroeconomics, American Economic Association, vol. 3(4), pages 143-180, October.
    4. 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.
    5. Leigh A. Riddick & Toni M. Whited, 2009. "The Corporate Propensity to Save," Journal of Finance, American Finance Association, vol. 64(4), pages 1729-1766, August.
    6. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2002. "Corporate Liquidity," CEPR Discussion Papers 3499, C.E.P.R. Discussion Papers.
    7. Andrea Gamba & Alexander Triantis, 2008. "The Value of Financial Flexibility," Journal of Finance, American Finance Association, vol. 63(5), pages 2263-2296, October.
    8. Christopher A. Hennessy & Toni M. Whited, 2005. "Debt Dynamics," Journal of Finance, American Finance Association, vol. 60(3), pages 1129-1165, June.
    9. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    10. Raj Chetty & Emmanuel Saez, 2006. "The Effects of the 2003 Dividend Tax Cut on Corporate Behavior: Interpreting the Evidence," American Economic Review, American Economic Association, vol. 96(2), pages 124-129, May.
    11. DeAngelo, Harry & DeAngelo, Linda & Whited, Toni M., 2011. "Capital structure dynamics and transitory debt," Journal of Financial Economics, Elsevier, vol. 99(2), pages 235-261, February.
    12. Shyam-Sunder, Lakshmi & C. Myers, Stewart, 1999. "Testing static tradeoff against pecking order models of capital structure," Journal of Financial Economics, Elsevier, vol. 51(2), pages 219-244, February.
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    Cited by:

    1. Tito Boeri & Pietro Garibaldi & Espen R. Moen, 2014. "Financial Constraints in Search Equilibrium: Mortensen and Pissarides Meet Holmstrom and Tirole," CEP Discussion Papers dp1317, Centre for Economic Performance, LSE.
    2. repec:eee:jbfina:v:81:y:2017:i:c:p:24-35 is not listed on IDEAS
    3. Zhiguo He & Péter Kondor, 2016. "Inefficient Investment Waves," Econometrica, Econometric Society, vol. 84, pages 735-780, March.
    4. Philippe BACCHETTA & Kenza BENHIMA & Céline POILLY, "undated". "Corporate Cash and Employment," Swiss Finance Institute Research Paper Series 14-01, Swiss Finance Institute.
    5. Ricardo Bebczuk & Eduardo Cavallo, 2016. "Is business saving really none of our business?," Applied Economics, Taylor & Francis Journals, vol. 48(24), pages 2266-2284, May.
    6. Loukas Karabarbounis & Brent Neiman, 2012. "Declining Labor Shares and the Global Rise of Corporate Saving," NBER Working Papers 18154, National Bureau of Economic Research, Inc.
    7. Boeri, Tito & Garibaldi, Pietro & Moen, Espen R, 2014. "Financial Constraints in Search Equilibrium," CEPR Discussion Papers 10266, C.E.P.R. Discussion Papers.
    8. Siemer, Michael, 2014. "Firm Entry and Employment Dynamics in the Great Recession," Finance and Economics Discussion Series 2014-56, Board of Governors of the Federal Reserve System (U.S.).

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