Firm Selection and Corporate Cash Holdings

56 Pages Posted: 21 May 2016 Last revised: 9 Apr 2018

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Berardino Palazzo

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

Abstract

Among stock market entrants, more firms over time are R&D–intensive with initially lower profitability but higher growth potential. This sample-selection effect determines the secular trend in U.S. public firms’ cash holdings. A stylized firm industry model allows us to analyze two competing changes to the selection mechanism: a change in industry composition and a shift toward less profitable R&D–firms. The latter is key to generating higher cash ratios at IPO, necessary for the secular increase, whereas the former mechanism amplifies this effect. The data confirm the prominent role played by selection, and corroborate the model’s predictions.

Suggested Citation

Begenau, Juliane and Palazzo, Berardino, Firm Selection and Corporate Cash Holdings (February 2017). Harvard Business School Finance Working Paper No. 16-130. Available at SSRN: https://ssrn.com/abstract=2782095 or http://dx.doi.org/10.2139/ssrn.2782095

Juliane Begenau (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
United States
6507245661 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Berardino Palazzo

Federal Reserve Board ( email )

1801 K street NW
Washington, DC 20036
United States

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