Firm Selection and Corporate Cash Holdings

56 Pages Posted: 21 May 2016 Last revised: 9 Apr 2018

See all articles by Juliane Begenau

Juliane Begenau

Stanford University - Graduate School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Berardino Palazzo

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: February 2017

Abstract

Among stock market entrants, more firms over time are R&D–intensive with initially lower profitability but higher growth potential. This sample-selection effect determines the secular trend in U.S. public firms’ cash holdings. A stylized firm industry model allows us to analyze two competing changes to the selection mechanism: a change in industry composition and a shift toward less profitable R&D–firms. The latter is key to generating higher cash ratios at IPO, necessary for the secular increase, whereas the former mechanism amplifies this effect. The data confirm the prominent role played by selection, and corroborate the model’s predictions.

Suggested Citation

Begenau, Juliane and Palazzo, Berardino, Firm Selection and Corporate Cash Holdings (February 2017). Harvard Business School Finance Working Paper No. 16-130, Available at SSRN: https://ssrn.com/abstract=2782095 or http://dx.doi.org/10.2139/ssrn.2782095

Juliane Begenau (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford, CA 94305
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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
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Berardino Palazzo

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
United States

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