Bonding With Risk: Corporate Investment and Savings in Risky Financial Assets

66 Pages Posted: 17 Jan 2022 Last revised: 4 Nov 2023

See all articles by Teng Huang

Teng Huang

Neoma Business School

Stefano Sacchetto

IESE Business School

Date Written: January 17, 2022

Abstract

We study the rationale behind firms’ investment in risky financial assets by formulating a dynamic model in which firms allocate their precautionary savings to both safe and risky securities. In equilibrium, risky financial asset holdings are positively related to the sensitivity of a firm's financing deficit to the risky asset returns---the "financing deficit beta." Using a comprehensive sample of US corporate financial asset holdings, we find evidence of a positive correlation between risky financial asset holdings and financing deficit betas that capture firms’ incentives to hedge medium-to-long term interest-rate risk. Precautionary motives are stronger in small and R&D-intensive firms.

Keywords: Cash Holdings, Risky Corporate Financial Assets, State-Contingent Liquidity, Corporate Investment

JEL Classification: G11, G31, G32

Suggested Citation

Huang, Teng and Sacchetto, Stefano, Bonding With Risk: Corporate Investment and Savings in Risky Financial Assets (January 17, 2022). Available at SSRN: https://ssrn.com/abstract=4010801 or http://dx.doi.org/10.2139/ssrn.4010801

Teng Huang (Contact Author)

Neoma Business School ( email )

1 Rue du Maréchal Juin
Mont Saint Aignan Cedex, 76825
France

Stefano Sacchetto

IESE Business School ( email )

08034 Barcelona
Spain
+34 93 253 6461 (Phone)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
197
Abstract Views
3,674
Rank
299,210
PlumX Metrics