Finance Seminar with Thomas Gilbert, Foster School of Business, University of Washington

The Department of Finance is proud to announce the upcoming seminar with Thomas Gilbert, Foster School of Business, University of Washington.

Thomas Gilbert will present:

Precautionary Savings with Risky Assets: When Cash Is Not Cash

Authors:

Thomas Gilbert, Foster School of Business, University of Washington
Ran Duchin, Foster School of Business, University of Washington
Jarrad Harford, Foster School of Business, University of Washington
Christopher Hrdlicka, Foster School of Business, University of Washington

Abstract

We study the investment securities that make up corporate cash holdings. Exploiting the 2009 accounting standard SFAS No. 157, which requires firms to report the composition and fair value of their financial instruments, we hand-collect detailed data on firms’ investment securities and assess their risk. Our estimates show that, on average, the value of risky securities is 27% of that of corporate cash holdings and 6% of total book assets. Contrary to the precautionary savings motive, risky security investments are concentrated in firms traditionally thought to have a high demand for precautionary savings that operate in the Technology and Health industries and have volatile cash flow and high Tobin’s Q. Our evidence is consistent with a speculative motive for holding cash, which is particularly strong in firms with “excess” or “trapped” cash reserves that pay managers with stock options. We also find that risky security investments imply greater systematic risk (beta) but lower risk-adjusted performance. The lack of positive alphas provides no evidence of managers creating value by speculating.