Corporate Market Investments: An Examination of the Cash Storage View

Abstract:     
Traditional cash demand models view investments in marketable securities (or market investments) as a simple store of cash or excess cash. However, traditional moderate investments in US Treasuries have evolved into larger, more opaque, and more diverse investments, amounting to roughly 50% of tangible assets for US nonfinancial companies. This paper examines the cash storage view by comparing market investment regression coefficients to coefficients for cash regressions and excess cash regressions. The average coefficient difference between cash and market investment regressions is 24%. This paper uses a novel two-stage method to compare market investment to excess cash. For trapped-cash firms that are constrained to store excess cash as market investment, the average coefficient difference is zero. However for all firms, the average coefficient difference between excess cash and market investment regressions is 12%. Compared to excess cash, market investment has more in common with general investment, future financial commitments, and dividend payout. Coefficient differences exist regardless of size and multiple-segment status. Furthermore, the capital-expenditure coefficient difference increases with future acquisitions. Taken together, these findings suggest that market investment is no longer a simple store of cash or excess cash.

Number of Pages in PDF File: 59

Keywords: Market Investment, Cash, Asset-Liability Management, Payout Policy

JEL Classification: G11, G31, G32, G35

working papers series