Existing Methods Provide Unreliable Estimates of the Marginal Value of Cash

Posted: 14 Apr 2016 Last revised: 6 May 2020

See all articles by Joseph Taylor Halford

Joseph Taylor Halford

University of Nevada, Reno

John J. McConnell

Purdue University

Valeriy Sibilkov

University of Wisconsin - Milwaukee - Department of Finance

Nataliya S. Zaiats

Suffolk University - Sawyer School of Management

Date Written: May 5, 2020

Abstract

Some estimates of the marginal values of cash reported in existing literature appear inconsistent with economic common sense. We establish reasonable benchmark values for the marginal value of cash based on economic theory and empirical evidence. In various samples and contexts, the estimates of the marginal value of cash violate their respective benchmarks. Furthermore, we propose a diagnostic test to examine the reliability of the estimation methodology. The estimates fail the test. The existing methodology of Faulkender and Wang (2006) for estimating the marginal value of cash is unreliable, and empirical estimates that result should be treated with caution.

Keywords: Cash; cash policies; value of cash; financial constraints

JEL Classification: G32, G34

Suggested Citation

Halford, Joseph Taylor and McConnell, John J. and Sibilkov, Valeriy and Zaiats, Nataliya S., Existing Methods Provide Unreliable Estimates of the Marginal Value of Cash (May 5, 2020). Available at SSRN: https://ssrn.com/abstract=2761699 or http://dx.doi.org/10.2139/ssrn.2761699

Joseph Taylor Halford

University of Nevada, Reno ( email )

Reno, NV 89557-0016
United States

John J. McConnell

Purdue University ( email )

MGMT, KRAN
403 West State St.
West Lafayette, IN 47907-2056
United States
765-494-5910 (Phone)
765-494-7863 (Fax)

Valeriy Sibilkov (Contact Author)

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

Nataliya S. Zaiats

Suffolk University - Sawyer School of Management ( email )

Boston, MA 02108
United States

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