The Marginal Value of Cash: Structural Estimates from a Model with Financing and Agency Frictions

How much value does an additional dollar of cash create for a firm? It is generally recognized that the marginal value of cash (MVC) can either exceed or fall below one dollar. Estimates of MVC can guide corporate cash and payout policy, indicate the quality of governance, and make a firm a target for takeover or activism. Yet, the existing methods of estimation lack a rigorous theoretical foundation and often provide implausibly high or low estimates. In this paper, we provide a formulation of MVC and structurally estimate the MVC based on a model which encompasses the important determinants for the choice of cash savings, including financing and agency costs. We find that firms with large cash and capital stocks have lower marginal value of cash, while the relation between leverage and marginal value of cash is hump-shaped. Two quasi-natural experiments validate the MVC estimates.

Keywords: marginal value of cash, corporate cash policy, agency problems, financial constraints, costly external finance

JEL Classification: G32, G34, G35

Suggested Citation: Suggested Citation

Dasgupta, Sudipto and Li, Di and Li, Erica X. N., The Marginal Value of Cash: Structural Estimates from a Model with Financing and Agency Frictions (January 4, 2022). Management Science forthcoming, Available at SSRN: https://ssrn.com/abstract=4000431 or http://dx.doi.org/10.2139/ssrn.4000431