Events

Finance Seminar

Authors:

• Jarrad Harford
  University of Washington Business School

• Ran Duchin
  University of Washington Business School

• Thomas Gilbert
  University of Washington Business School

• Christopher Hrdlicka
  University of Washington Business School

We study the investment securities that make up corporate cash holdings. Exploiting the 2009 accounting standard SFAS No. 157, which requires firms to report the composition and fair value of their financial instruments, we hand-collect detailed data on firms' investment securities and assess their risk. Our estimates show that, on average, the value of risky securities is 27% of that of corporate cash holdings and 6% of total book assets. Contrary to the precautionary savings motive, risky security investments are concentrated in firms traditionally thought to have a high demand for precautionary savings such as firms in the technology or health industries, firms with volatile cash flows, or firms with high Tobin's Q. Our evidence is consistent with a speculative motive for holding cash, which is particularly strong in firms with "excess" or "trapped" cash reserves, or in firms with managers who are overconfident or paid with stock options. Risky reserve investments are funded out of free cash flow, not external capital raising. We estimate that investors value the marginal dollar invested in risky assets lower than if it were invested in safe assets.