NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Firm Selection and Corporate Cash Holdings

Juliane Begenau, Berardino Palazzo

NBER Working Paper No. 23249
Issued in March 2017
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth

Among stock market entrants, more firms over time are R&D–intensive with initially lower profitability but higher growth potential. This sample-selection effect determines the secular trend in U.S. public firms’ cash holdings. A stylized firm industry model allows us to analyze two competing changes to the selection mechanism: a change in industry composition and a shift toward less profitable R&D–firms. The latter is key to generating higher cash ratios at IPO, necessary for the secular increase, whereas the former mechanism amplifies this effect. The data confirm the prominent role played by selection, and corroborate the model’s predictions.

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Document Object Identifier (DOI): 10.3386/w23249

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