89 Pages Posted: 3 Nov 2013 Last revised: 28 May 2016
Date Written: May 27, 2016
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’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of risky financial investments. Consistent with the model’s predictions, risky assets are concentrated in financially unconstrained firms that hold large financial portfolios. Further, they are undertaken by poorly governed firms and discounted by 13-22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.
Keywords: Cash, Precautionary Savings, Investment Securities, Risk, Liquidity, SFAS 157, Fair Value, Taxes
JEL Classification: G32, G34
Suggested Citation: Suggested Citation
Duchin, Ran and Gilbert, Thomas and Harford, Jarrad and Hrdlicka, Christopher M., Precautionary Savings with Risky Assets: When Cash Is Not Cash (May 27, 2016). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2348415 or http://dx.doi.org/10.2139/ssrn.2348415