Bonding With Risk: Corporate Investment and Savings in Risky Financial Assets
66 Pages Posted: 17 Jan 2022 Last revised: 4 Nov 2023
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: Suggested Citation