The Macroeconomics of Firms' Savings

Abstract

The U.S. non-financial corporate sector became a net lender vis-a-vis the rest of the economy in the early 2000s. We document this fact in the aggregate and firm-level data. We then develop a structural dynamic model with investment to study the firms' financing decisions. Debt is fiscally advantageous but subject to a no-default borrowing constraint. Equity payouts comove positively with the firm's cash flow. We show firms accumulate financial assets for precautionary reasons, yet value equity as partial insurance against shocks. The calibrated model replicates the large fraction of publicly-traded firms with net savings observed in the period 2000-2007 as well as several other empirical features. Finally we exploit the higher fiscal cost of equity in the 1970s as a test of the theory: we find the model's predictions to line up very well with the data.

Keywords: Corporate savings, debt, equity, dividend taxation