Firm Selection and Corporate Cash Holdings

by Juliane Begenau and Berardino Palazzo

Overview — Over the last 30 years, firms have increased their cash holdings. This paper highlights the importance of an increasing share of R&D-intensive firms and more favorable IPO conditions. Both mechanisms help explain the increase in average cash-to-asset ratio for US public companies over three decades.

Author Abstract

The gradual replacement of traditional U.S. public companies by more R&D–intensive firms is key to understanding the secular trend in average cash holdings. Over the last 35 years, an increasing share of R&D–intensive firms has entered the stock market with progressively higher cash balances. This positive entry-effect dominates the negative within-firm effect post IPO. We build a firm industry model with endogenous entry to quantify the importance of two competing selection mechanisms: an increasing share of R&D–intensive firms in the overall economy and more favorable IPO conditions. Only the combination of both mechanisms successfully generates a sizable secular increase.

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