13 Jun 2016Working Paper Summaries

Firm Selection and Corporate Cash Holdings

by Juliane Begenau and Berardino Palazzo
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.

Paper Information

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