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