Why Has the Value of Cash Increased Over Time?

58 Pages Posted: 23 Dec 2011 Last revised: 26 Jan 2017

Thomas W. Bates

Arizona State University - Department of Finance

Chinghung (Henry) Chang

National Taiwan University - College of Management

Jianxin Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance

Date Written: January 23, 2017

Abstract

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

Bates, Thomas W. and Chang, Chinghung (Henry) and Chi, Jianxin Daniel, Why Has the Value of Cash Increased Over Time? (January 23, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1975491 or http://dx.doi.org/10.2139/ssrn.1975491

Thomas W. Bates

Arizona State University - Department of Finance ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Ching-Hung Chang

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

Jianxin Daniel Chi (Contact Author)

University of Nevada, Las Vegas (UNLV) - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

HOME PAGE: http://www.unlv.edu/people/jianxin-chi

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