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Journal of Financial Economics Vol. 139 No. 3 2021

Firm selection and corporate cash holdings

Juliane Begenau1; Berardino Palazzo2,3

1 Center for Economic and Policy Research · 2 Federal Reserve Board of Governors · 3 Federal Reserve

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.

DOI
10.1016/j.jfineco.2020.09.001
Volume
139
Issue
3
Pages
697-718
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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