Why Has the Value of Cash Increased Over Time?
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
January 23, 2017
Journal of Financial and Quantitative Analysis (JFQA), Forthcoming
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.
Number of Pages in PDF File: 58
Keywords: Cash Holdings; Value of Cash; Financing Frictions; Speed of Adjustment; Agency Conflicts
JEL Classification: G30, G32, G34, G35
Date posted: December 23, 2011 ; Last revised: January 26, 2017