Differences Between Savings from Equity Issuance and Savings from Cash Flow

Abstract

Firms have different choices of using equity issuance and cash flow to save. Empirically, we find three differences between savings from equity issuance and cash flow. First, firms may not increase or decrease the savings rates of equity issuance and cash flow at the same time. Second, the savings rate of equity issuance is higher than that of cash flow. Third, in 1985-2016, the savings rate of equity issuance increases more than that of cash flow. To investigate the differences, we analyze the cash-savings motives from the following perspectives: growth options, financial constraints, and equity overvaluation. Our theory predicts that the savings rate of equity issuance increases in the above three scenarios, whereas the savings rate of cash flow only increases because of financial constraints. Empirical results suggest that the savings motives result in the first difference and the growth of intangible investment causes the second and third differences.

Keywords: precautionary saving; savings rate; growth options; financial constraints; market timing

JEL Classification: G30; G31; G32