Aggregate Issuance and Savings Waves

Abstract:     
We document the fact that at both the aggregate and the firm level, corporations tend to simultaneously raise external finance and accumulate liquid assets, and we use this fact to make inferences about the aggregate cost of external finance over time. For all but the very largest firms, the aggregate correlation between external finance raised and liquidity accumulation is 0.6, and the average firm level correlation is 0.2. Conditioning on firms that raise external finance, the aggregate correlation increases to 0.74. We also show that firms' decisions in the cross-section about their sources and uses of funds can be useful for identifying the aggregate level of the cost of external finance. Specifically, we measure the cross-sectional correlation between external finance and liquidity accumulation at each date, and show that the time series of this cross-sectional correlation is highly correlated with traditional measures of the cost of external finance. Accordingly, we use our dynamic model of firm financing and savings, along with cross-sectional moments describing firms' internal and external financing decisions to estimate a time series for the aggregate cost of external finance in the US time series 1980-2010.

Number of Pages in PDF File: 53

Keywords: liquidity management, external finance

JEL Classification: G31, G32, E22

working papers series