Abstract

http://ssrn.com/abstract=2348415
 
 

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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

August 5, 2014


Abstract:     
We hand-collect data on corporate reserves and find that 40% of total reserves, or 6% of total book assets, are held in risky assets. Furthermore, 35% of total reserves are illiquid. While firms’ safe reserves can be explained by a precautionary savings motive, their risky and illiquid reserves cannot – they are concentrated in large, profitable firms, with excess reserves and low cash flow volatility. We assess the optimality of this strategy and show that investors discount the value of a marginal dollar allocated to risky reserves. We conclude that this activity represents a tax-disadvantaged asset management industry of more than $1.5 trillion.

Number of Pages in PDF File: 66

Keywords: Cash, Liquidity, Reserves, Investment Securities, Risk, SFAS No. 157, Fair Value, Taxes

JEL Classification: G32, G34

working papers series


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Date posted: November 3, 2013 ; Last revised: August 6, 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 (August 5, 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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