Abstract
Certain estimates of the marginal value of cash (MVC) reported by Faulkender and Wang (FW, 2006) conflict with the predictions of their conceptual framework. The ex ante procedure they use to identify cash regimes, a central determinant of MVC, misclassifies firms. We propose an ex post cash regime identification, along with a modest change to FW’s regression specification. These modifications align the estimates with the predictions of FW’s framework. Ex post identification renders the effects of financial constraints on MVC insignificant. This paper reaffirms the importance of identifying and accounting for cash regimes, ignored by most existing studies of MVC.
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