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Precautionary Savings with Risky Assets: When Cash Is Not Cash

Year: 2016

Type: article

Abstract: ABSTRACT U.S. industrial firms invest heavily in noncash, risky financial assets such as corporate debt, equity, and mortgage‐backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of this behavior. Consistent with the model, risky assets are concentrated in financially unconstrained firms holding large financial portfolios, are held by poorly governed firms, and are discounted by 13% to 22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.

Source: The Journal of Finance

DOI: 10.1111/jofi.12490

Authors: RAN DUCHIN, THOMAS GILBERT, JARRAD HARFORD, CHRISTOPHER HRDLICKA

Institutions: University of Washington, Carnegie Mellon University

Language: English

Topic: Corporate Finance and Governance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2602498544

FWCI: 49.99

Cites: 83

Cited by: 356

Related to: 10