Why Has the Value of Cash Increased Over Time?
Thomas W. Bates
Arizona State University - Department of Finance
Chinghung (Henry) Chang
National Taiwan University - College of Management
Jianxin Daniel Chi
University of Nevada, Las Vegas (UNLV) - Department of Finance
April 14, 2016
The value of corporate cash holdings has increased significantly in recent decades. On average, one dollar 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 firms’ investment opportunity set and cash-flow volatility. Greater product market competition and credit market risk also played a role, however we find no link between the trend in value and the quality of corporate governance. Finally, we document a secular decrease in the speed of adjustment in cash holdings, suggesting that the value gain is attributable to capital market frictions.
Number of Pages in PDF File: 54
Keywords: Cash Holdings; Value of Cash; Financing Frictions; Speed of Adjustment; Agency Conflicts
JEL Classification: G30, G32, G34, G35
Date posted: December 23, 2011 ; Last revised: April 16, 2016
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