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Why Has the Value of Cash Increased Over Time?

Published online by Cambridge University Press:  19 March 2018

Thomas W. Bates ,
Ching-Hung Chang  and
Jianxin Daniel Chi
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Abstract

The value of corporate cash holdings has increased significantly in recent decades. On average, $1 of cash is valued at $0.61 in the 1980s, $1.04 in the 1990s, and $1.12 in the 2000s. This increase is predominantly driven by the investment opportunity set and cash-flow volatility, as well as secular trends in product market competition, credit market risk, and within-firm diversification. We document a secular decrease in the speed of adjustment (SOA) in cash holdings, particularly for financially constrained firms with cash deficits, suggesting that capital market frictions can account for the trend in the value of cash holdings.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 2 , April 2018 , pp. 749 - 787
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Jarrad Harford (the editor) and an anonymous referee, whose suggestions have significantly improved the paper. For helpful comments and suggestions, we also thank Aziz Alimov, Sreedhar Bharath, Claudia Custódio, Mark Huson, Shane Johnson, Tae-Nyun Kim, Michael Lemmon, Robert Parrino, Xunhua Su, Mike Sullivan, Neng Wang, and seminar participants at the 2012 China International Conference in Finance, the 2012 International Conference on Financial Risk and Corporate Finance Management, and the 2012 Financial Management Association Meeting. Chang gratefully acknowledges financial support from Minister of Science and Technology of Taiwan. Chi gratefully acknowledges financial support from the Key Program of National Natural Science Foundation of China (71731003).

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