Abstract

http://ssrn.com/abstract=2348415
 
 

References (32)



 


 



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

June 23, 2015


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’ investment portfolios, or 6% of total book assets. They are concentrated in financially unconstrained firms, with large investment portfolios, and low demand for precautionary savings. We assess the optimality of risky investments and find that they are undertaken by poorly-governed firms and discounted by 13-22% compared to safe investments. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, which questions the traditional boundaries of nonfinancial firms.

Number of Pages in PDF File: 67

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

JEL Classification: G32, G34


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Date posted: November 3, 2013 ; Last revised: June 26, 2015

Suggested Citation

Duchin, Ran and Gilbert, Thomas and Harford, Jarrad and Hrdlicka, Christopher M., Precautionary Savings with Risky Assets: When Cash Is Not Cash (June 23, 2015). 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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