Why Has the Value of Cash Increased Over Time?
58 Pages Posted: 23 Dec 2011 Last revised: 25 Apr 2018
Date Written: January 23, 2017
The value of corporate cash holdings has increased significantly in recent decades. On average, one dollar of cash is valued at $0.61 in the 1980s, $1.04 in the 1990s, and $1.12 in the 2000s. This increase is predominantly driven by the investment opportunity set and cash-flow volatility, as well as secular trends in product market competition, credit market risk, and within-firm diversification. We document a secular decrease in the speed of adjustment in cash holdings, particularly for financially constrained firms with cash deficits, suggesting that capital market frictions can account for the trend in the value of cash holdings.
Keywords: Cash Holdings; Value of Cash; Financing Frictions; Speed of Adjustment; Agency Conflicts
JEL Classification: G30, G32, G34, G35
Suggested Citation: Suggested Citation