Abstract

http://ssrn.com/abstract=2348415
 


 



Precautionary Savings with Risky Assets: When Cash Is Not Cash


Ran Duchin


University of Washington - Michael G. Foster School of Business

Thomas Gilbert


University of Washington - Department of Finance and Business Economics

Jarrad Harford


University of Washington

Christopher M. Hrdlicka


University of Washington - Michael G. Foster School of Business

February 10, 2014


Abstract:     
We study the investment securities that make up corporate cash holdings. Exploiting the 2009 accounting standard SFAS No. 157, which requires firms to report the composition and fair value of their financial instruments, we hand-collect detailed data on firms’ investment securities and assess their risk. Our estimates show that, on average, the value of risky securities is 27% of that of corporate cash holdings and 6% of total book assets. Contrary to the precautionary savings motive, risky security investments are concentrated in firms traditionally thought to have a high demand for precautionary savings such as firms in the technology or health industries, firms with volatile cash flows, or firms with high Tobin’s Q. Our evidence is consistent with a speculative motive for holding cash, which is particularly strong in firms with “excess” or “trapped” cash reserves, or in firms with managers who are overconfident or paid with stock options. Furthermore, we find that firms with riskier productive assets are choosing to increase the risk of their reserve assets, which is consistent with a reaching for yield explanation. We also find evidence that risky security investments are correlated with negative alphas, which shows that investors are not positively surprised by managers’ ability, or lack thereof, to create value by investing in risky assets.

Number of Pages in PDF File: 62

Keywords: Cash, liquidity, investment securities, risk, SFAS 157

JEL Classification: G32, G34

working papers series


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Date posted: November 3, 2013 ; Last revised: February 11, 2014

Suggested Citation

Duchin, Ran and Gilbert, Thomas and Harford, Jarrad and Hrdlicka, Christopher M., Precautionary Savings with Risky Assets: When Cash Is Not Cash (February 10, 2014). Available at SSRN: http://ssrn.com/abstract=2348415 or http://dx.doi.org/10.2139/ssrn.2348415

Contact Information

Ran Duchin
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195-3200
United States
Thomas Gilbert
University of Washington - Department of Finance and Business Economics ( email )
Box 353200
Seattle, WA 98195
United States
206-616-7184 (Phone)
HOME PAGE: http://faculty.washington.edu/gilbertt/
Jarrad Harford
University of Washington ( email )
Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)
HOME PAGE: http://faculty.washington.edu/jarrad/
Christopher M. Hrdlicka (Contact Author)
University of Washington - Michael G. Foster School of Business ( email )
Box 353200
Seattle, WA 98195
United States
206.616.0332 (Phone)
206.542.7472 (Fax)
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