Why Has the Value of Cash Increased over Time
Why has the value of cash increased over time? *
Thomas W. Bates Arizona State University Thomas.Bates@asu.edu Ching-Hung (Henry) Chang Arizona State University Ching-Hung.Chang@asu.edu Jianxin (Daniel) Chi University of Nevada, Las Vegas Daniel.Chi@unlv.edu
First Draft: January 2011 This Draft: December 2011
Abstract: The value of cash holdings by U.S. non-financial firms has increased significantly over the past three decades. An additional dollar of cash holdings is valued at $0.61 in the 1980s, $1.04 in the 1990s, and $1.12 in the 2000s. The increase in the value of cash obtains across a variety of firm characteristics, including firm size, the investment opportunity set, financial constraints, and the volatility of cash flow. The general increase in the value of cash can be partially explained by firms that IPO in the 1990s and the 2000s. However, for the 1990s, the increase in the value of cash is predominantly determined by a firm’s investment opportunity set and the volatility of its cash flow. For the 2000s, the increase in the value of cash is largely explained by credit market risk.
*The authors thank Sreedhar Bharath, Claudia Custodio, Mark Huson, Shane Johnson, Michael Lemmon, Robert Parrino, and Neng Wang for their helpful comments and suggestions.
Investor concern over the rising cash holdings of U.S. companies has been a consistent focus of the financial press in recent years. 1 The issue of corporate cash holdings has also gained the attention of policy makers. For example, President Barack Obama recently called on U.S. business leaders to spend their corporate cash holdings to spur economic growth, and members of Congress are calling for a tax holiday on repatriated cash.2 Shareholder uneasiness with the increase in corporate cash holdings obtains on two related dimensions: (1) what caused the increased propensity to hold cash, and (2) what is the value of incremental cash holdings for a corporation’s investors. Bates, Kahle, and
Thomas W. Bates Arizona State University Thomas.Bates@asu.edu Ching-Hung (Henry) Chang Arizona State University Ching-Hung.Chang@asu.edu Jianxin (Daniel) Chi University of Nevada, Las Vegas Daniel.Chi@unlv.edu
First Draft: January 2011 This Draft: December 2011
Abstract: The value of cash holdings by U.S. non-financial firms has increased significantly over the past three decades. An additional dollar of cash holdings is valued at $0.61 in the 1980s, $1.04 in the 1990s, and $1.12 in the 2000s. The increase in the value of cash obtains across a variety of firm characteristics, including firm size, the investment opportunity set, financial constraints, and the volatility of cash flow. The general increase in the value of cash can be partially explained by firms that IPO in the 1990s and the 2000s. However, for the 1990s, the increase in the value of cash is predominantly determined by a firm’s investment opportunity set and the volatility of its cash flow. For the 2000s, the increase in the value of cash is largely explained by credit market risk.
*The authors thank Sreedhar Bharath, Claudia Custodio, Mark Huson, Shane Johnson, Michael Lemmon, Robert Parrino, and Neng Wang for their helpful comments and suggestions.
Investor concern over the rising cash holdings of U.S. companies has been a consistent focus of the financial press in recent years. 1 The issue of corporate cash holdings has also gained the attention of policy makers. For example, President Barack Obama recently called on U.S. business leaders to spend their corporate cash holdings to spur economic growth, and members of Congress are calling for a tax holiday on repatriated cash.2 Shareholder uneasiness with the increase in corporate cash holdings obtains on two related dimensions: (1) what caused the increased propensity to hold cash, and (2) what is the value of incremental cash holdings for a corporation’s investors. Bates, Kahle, and