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The Corporate Propensity to Save

53 Pages Posted: 7 Nov 2006 Last revised: 5 Feb 2012

Leigh A. Riddick

American University - Kogod School of Business

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: July 8, 2007

Abstract

Why and how do corporations accumulate liquid assets? We show theoretically that intertemporal trade-offs between interest income taxation and the cost of external finance determine optimal savings. We find the striking result that, controlling for Tobin's q, saving and cash flow are negatively related because firms lower cash reserves to invest after receiving positive cash-flow shocks, and vice versa. Consistent with theory, we estimate negative propensities to save out of cash flow. We also find that income uncertainty affects saving more than do external finance constraints. Therefore, contrary to previous evidence, saving propensities reflect too many individual forces to be used to measure external finance constraints.

Keywords: Corporate saving, cash, investment, costly external finance, uncertainty

JEL Classification: G31, G32, E22

Suggested Citation

Riddick, Leigh A. and Whited, Toni M., The Corporate Propensity to Save (July 8, 2007). Available at SSRN: https://ssrn.com/abstract=942848 or http://dx.doi.org/10.2139/ssrn.942848

Leigh A. Riddick

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
202.885.1944 (Phone)

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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