Hostname: page-component-78c5997874-s2hrs Total loading time: 0 Render date: 2024-11-16T01:43:11.816Z Has data issue: false hasContentIssue false
  • English
  • Français

Why Has the Value of Cash Increased Over Time?

Published online by Cambridge University Press:  19 March 2018

Thomas W. Bates ,
Ching-Hung Chang  and
Jianxin Daniel Chi
Get access Rights & Permissions [Opens in a new window]

Abstract

The value of corporate cash holdings has increased significantly in recent decades. On average, $1 of cash is valued at $0.61 in the 1980s, $1.04 in the 1990s, and $1.12 in the 2000s. This increase is predominantly driven by the investment opportunity set and cash-flow volatility, as well as secular trends in product market competition, credit market risk, and within-firm diversification. We document a secular decrease in the speed of adjustment (SOA) in cash holdings, particularly for financially constrained firms with cash deficits, suggesting that capital market frictions can account for the trend in the value of cash holdings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 2 , April 2018 , pp. 749 - 787
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We thank Jarrad Harford (the editor) and an anonymous referee, whose suggestions have significantly improved the paper. For helpful comments and suggestions, we also thank Aziz Alimov, Sreedhar Bharath, Claudia Custódio, Mark Huson, Shane Johnson, Tae-Nyun Kim, Michael Lemmon, Robert Parrino, Xunhua Su, Mike Sullivan, Neng Wang, and seminar participants at the 2012 China International Conference in Finance, the 2012 International Conference on Financial Risk and Corporate Finance Management, and the 2012 Financial Management Association Meeting. Chang gratefully acknowledges financial support from Minister of Science and Technology of Taiwan. Chi gratefully acknowledges financial support from the Key Program of National Natural Science Foundation of China (71731003).

References

Alimov, A.“Product Market Competition and the Value of Corporate Cash: Evidence from Trade Liberalization.” Journal of Corporate Finance, 25 (2014), 122–139.Google Scholar
Almeida, H.; Campello, M.; and Weisbach, M. S.. “The Cash Flow Sensitivity of Cash.” Journal of Finance, 59 (2004), 1777–1804.CrossRefGoogle Scholar
Auerbach, A. J.“Real Determinants of Corporate Leverage.” In Corporate Capital Structure in the United States, Friedman, B. M., ed. National Bureau of Economic Research (1985), 301–324. Available at http://www.nber.org/papers/w1151.Google Scholar
Baker, M.; Wurgler, J.; and Yuan, Y.. “Global, Local, and Contagious Investor Sentiment.” Journal of Financial Economics, 104 (2012), 272–287.CrossRefGoogle Scholar
Bates, T.; Kahle, K.; and Stulz, R.. “Why Do U.S. Firms Hold So Much More Cash Than They Used To?” Journal of Finance, 64 (2009), 1985–2021.CrossRefGoogle Scholar
Blouin, J., and Krull, L.. “Bringing It Home: A Study of the Incentives Surrounding the Repatriation of Foreign Earnings under the American Jobs Creation Act of 2004.” Journal of Accounting Research, 47 (2009), 1027–1059.CrossRefGoogle Scholar
Blundell, R., and Bond, S.. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics, 87 (1998), 115–143.Google Scholar
Chang, X., and Dasgupta, S.. “Target Behavior and Financing: How Conclusive Is the Evidence?” Journal of Finance, 64 (2009), 1767–1796.Google Scholar
Chen, T.; Harford, J.; and Lin, C.. “Do Analysts Matter for Governance? Evidence from Natural Experiments.” Journal of Financial Economics, 115 (2015), 383–410.Google Scholar
Cremers, M., and Nair, V.. “Governance Mechanisms and Equity Prices.” Journal of Finance, 60 (2005), 2859–2894.Google Scholar
Chi, J. D., and Su, X.. “Product Market Threats and the Value of Corporate Cash Holdings.” Financial Management, 45 (2016), 705–735.CrossRefGoogle Scholar
Chung, J.; Jung, B.; and Park, D.. “Has the Value of Cash Increased Over Time?” Working Paper, Korea University (2012).Google Scholar
Cooper, M., and Jensen, T.. “Aggregate Funding Conditions, Cash, and the Cross-Section of Stock Returns.” Working Paper, available at http://ssrn.com/abstract=2622676 (2017).Google Scholar
Custódio, C.; Ferreira, M. A.; and Laureano, L.. “Why Are U.S. Firms Using More Short-Term Debt?” Journal of Financial Economics, 108 (2013), 182–212.CrossRefGoogle Scholar
Denis, D., and Sibilkov, V.. “Financial Constraints, Investment, and the Value of Cash Holdings.” Review of Financial Studies, 23 (2010), 247–269.CrossRefGoogle Scholar
Dittmar, A. K., and Duchin, R.. “The Dynamics of Cash.” Ross School of Business, Paper No. 1138, available at http://ssrn.com/abstract=1569529 (2010).Google Scholar
Dittmar, A., and Mahrt-Smith, J.. “Corporate Governance and the Value of Cash Holdings.” Journal of Financial Economics, 83 (2007), 599–634.Google Scholar
Dittmar, A.; Mahrt-Smith, J.; and Servaes, H.. “International Corporate Governance and Corporate Cash Holdings.” Journal of Financial and Quantitative Analysis, 38 (2003), 111–133.CrossRefGoogle Scholar
Duchin, R.“Cash Holdings and Corporate Diversification.” Journal of Finance, 65 (2010), 955–992.Google Scholar
Duchin, R.; Ozbas, O.; and Sensoy, B.. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis.” Journal of Financial Economics, 97 (2010), 418–435.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fama, E. F., and French, K. R.. “Taxes, Financing Decisions, and Firm Value.” Journal of Finance, 53 (1998), 819–843.Google Scholar
Fama, E. F., and French, K. R.. “Testing Trade-Off and Pecking Order Predictions about Dividends and Debt.” Review of Financial Studies, 15 (2002), 1–33.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.Google Scholar
Faulkender, M., and Wang, R.. “Corporate Financial Policy and the Value of Cash.” Journal of Finance, 61 (2006), 1957–1990.Google Scholar
Flannery, M., and Rangan, K.. “Partial Adjustment toward Target Capital Structures.” Journal of Financial Economics, 79 (2006), 469–506.Google Scholar
Foley, C.; Fritz, J. C.; Hartzell, S. T.; and Twite, G.. “Why Do Firms Hold So Much Cash? A Tax-Based Explanation.” Journal of Financial Economics, 86 (2007), 579–607.CrossRefGoogle Scholar
Frésard, L.“Financial Strength and Product Market Behavior: The Real Effects of Corporate Cash Holdings.” Journal of Finance, 65 (2010), 1097–1122.Google Scholar
Gamba, A., and Triantis, A.. “The Value of Financial Flexibility.” Journal of Finance, 63 (2008), 2263–2296.Google Scholar
Gao, H.; Harford, J.; and Li, K.. “Determinants of Corporate Cash Policy: Insights from Private Firms.” Journal of Financial Economics, 109 (2013), 623–639.CrossRefGoogle Scholar
Gompers, P. A.; Ishii, J. L.; and Metrick, A.. “Corporate Governance and Equity Prices.” Quarterly Journal of Economics, 118 (2003), 107–155.CrossRefGoogle Scholar
Hadlock, C. J., and Pierce, J. R.. “New Evidence on Measuring Financial Constraints: Moving beyond the KZ Index.” Review of Financial Studies, 23 (2010), 1909–1940.Google Scholar
Harford, J.“Corporate Cash Reserves and Acquisitions.” Journal of Finance, 54 (1999), 1969–1997.CrossRefGoogle Scholar
Harford, J.; Klasa, S.; and Maxwell, W. F.. “Refinancing Risk and Cash Holdings.” Journal of Finance, 69 (2014), 975–1012.CrossRefGoogle Scholar
He, Z., and Wintoki, M. B.. “The Cost of Innovation: R&D and High Cash Holdings in U.S. Firms.” Journal of Corporate Finance, 41 (2016), 280–303.Google Scholar
Irvine, P. J., and Pontiff, J.. “Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition.” Review of Financial Studies, 22 (2009), 1149–1177.CrossRefGoogle Scholar
Keynes, J. M. The General Theory of Employment, Interest and Money. London, UK: Harcourt Brace (1936).Google Scholar
Kim, C.; Mauer, D. C.; and Sherman, A. E.. “The Determinants of Corporate Liquidity: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 33 (1998), 335–359.Google Scholar
Lemmon, M. L.; Roberts, M. R.; and Zender, J. F.. “Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure.” Journal of Finance, 63 (2008), 1575–1608.Google Scholar
Liu, Y., and Mauer, D. C.. “Corporate Cash Holdings and CEO Compensation Incentives.” Journal of Financial Economics, 102 (2011), 183–198.Google Scholar
Loughran, T., and Ritter, J.. “Why Has IPO Underpricing Changed Over Time?” Financial Management, 33 (2004), 5–37.Google Scholar
Lyandres, E., and Palazzo, D.. “Cash Holdings, Competition, and Innovation.” Journal of Financial and Quantitative Analysis, 51 (2016), 1823–1861.Google Scholar
Morellec, E.; Nikolov, B.; and Zucchi, F.. “Competition, Cash Holdings, and Financing Decisions.” Working Paper, Swiss Finance Institute (2014).Google Scholar
Mulligan, C. B.“Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms.” Journal of Political Economy, 105 (1997), 1061–1079.Google Scholar
Opler, T.; Pinkowitz, L.; Stulz, R. M.; and Williamson, R.. “The Determinants and Implications of Corporate Cash Holdings.” Journal of Financial Economics, 52 (1999), 3–46.Google Scholar
Pinkowitz, L.; Stulz, R. M.; and Williamson, R.. “Do Firms in Countries with Poor Protection of Investor Rights Hold More Cash?” Journal of Finance, 61 (2006), 2725–2751.Google Scholar
Pinkowitz, L., and Williamson, R.. “What Is a Dollar Worth? The Market Value of Cash Holdings.” Working Paper, Georgetown University (2004).Google Scholar
Riddick, L. A., and Whited, T. M.. “The Corporate Propensity to Save.” Journal of Finance, 64 (2009), 1729–1766.Google Scholar
Schroth, E., and Szalay, D.. “Cash Breeds Success: The Role of Financing Constraints in Patent Races.” Review of Finance, 14 (2010), 73–118.Google Scholar
Shyam-Sunder, L., and Myers, S. C.. “Testing Static Tradeoff against Pecking Order Models of Capital Structure.” Journal of Financial Economics, 51 (1999), 219–244.Google Scholar
Taggart, R. A.“A Model of Corporate Financing Decisions.” Journal of Finance, 32 (1977), 1467–1484.CrossRefGoogle Scholar
Welch, I.“Capital Structure and Stock Returns.” Journal of Political Economy, 112 (2004), 106–131.Google Scholar
Whited, T. M., and Wu, G.. “Financial Constraints Risk.” Review of Financial Studies, 19 (2006), 531–559.Google Scholar