Abstract

http://ssrn.com/abstract=2348415
 
 

References (26)



 


 



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

May 27, 2016

Journal of Finance, Forthcoming

Abstract:     
We show that U.S. industrial firms invest heavily in non-cash, risky financial assets such as corporate debt, equity, and mortgage-backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of risky financial investments. Consistent with the model’s predictions, risky assets are concentrated in financially unconstrained firms that hold large financial portfolios. Further, they are undertaken by poorly governed firms and discounted by 13-22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.

Number of Pages in PDF File: 89

Keywords: Cash, Precautionary Savings, Investment Securities, Risk, Liquidity, SFAS 157, Fair Value, Taxes

JEL Classification: G32, G34


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Date posted: November 3, 2013 ; Last revised: May 28, 2016

Suggested Citation

Duchin, Ran and Gilbert, Thomas and Harford, Jarrad and Hrdlicka, Christopher M., Precautionary Savings with Risky Assets: When Cash Is Not Cash (May 27, 2016). Journal of Finance, Forthcoming. 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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