Finance Seminar（2014-08）

Topic: Can Changes in the Cost of Cash Resolve the Corporate Cash Puzzle?

Speaker: Martin C. Schmalz, University of Michigan

Time: Wednesday, 2 April, 10:00-11:30

Location: Room 217, Guanghua Building 2

Abstract: To answer this question, we first create a measure of the opportunity costs of holding liquid assets as the wedge between the cost of capital and the return of firms' cash portfolio. Exploiting both cross-sectional and time-series variation of opportunity costs 1980-2011, we estimate a negative effect of opportunity costs on the cash-to-assets ratio of U.S. nonfinancial Compustat firms. We then use the estimate to predict changes in aggregate cash holdings for 1945-2013 and find that they closely match actual changes in cash holdings over that period. Differences in opportunity costs also explain cross-country differences and within-country time variation of cash-to-assets ratios in the five largest European economies and Japan. Our results make evident that current U.S. corporate cash holdings are not abnormal, neither in a historical nor in an international comparison.

Paper: //papers.ssrn.com/sol3/papers.cfm?abstract_id=2367162

About the speaker: //sites.google.com/site/martincschmalz