Cash Holdings and the Selection Effect in the Eurozone

Abstract

We document an increase in the average cash holdings of public firms in the Eurozone core countries between 1986 and 2015. A significant jump in the series, at the end of the 1990’s, accounts for most of the observed change over the sample period. We can attribute this jump to a sudden modification in the composition of the population of public firms (selection effect), especially an increase in the proportion of cash rich R&D intensive firms with high growth opportunities. Most of these firms belong to the Health-care and Technology industries which may have benefited from favorable IPO conditions since this specific period. Nor changes in firms’ characteristics nor changes in firms’ cash policies justify significantly the observed trend in average cash holdings (no within effect). At the country level, differences in average cash holdings are mainly justified by heterogeneous proportion of R&D intensive firms across countries and not by differences in countries’ financial development or legal environment.

Keywords: Cash holdings, Eurozone firms, Financial policy

JEL Classification: G32