Abstract
We examine whether the high cash ratio and the secular increase in cash holdings of U.S. firms are driven by healthcare and technology industries. We find that these two industries have significantly increased their cash holdings from 1980 to 2015. It is only in these two industries that firms with riskier cash flow, financially constrained firms, R&D firms, low-efficiency firms, and firms with low institutional ownership and high board size dramatically increase their cash holdings. Similar firms in other industries do not substantially accumulate cash reserves. The explanatory powers of firm characteristics, industry characteristics, and industry competition on cash holdings in healthcare and technology industries are stronger than in other industries. Moreover, we find a causal effect of the 2008 financial crisis on the difference in cash holdings between healthcare and technology industries, and other industries.
Highlights
The static trade-off model of Shyam-Sunder & Myers (1999) suggests that firms should retain an optimal level of cash holdings that balances the marginal cost and benefit of cash holdings to maximize shareholder wealth
We examine whether the increase in cash holdings of U.S firms is driven by firms in healthcare and technology industries
We control for the variables of precautionary motives, agency costs, and corporate governance and find that the increase in cash holdings of firms with riskier cash flow, financially constrained firms, R&D firms, low-efficiency firms, and firms with low institutional ownership and large board size are concentrated in healthcare and technology industries
Summary
The static trade-off model of Shyam-Sunder & Myers (1999) suggests that firms should retain an optimal level of cash holdings that balances the marginal cost and benefit of cash holdings to maximize shareholder wealth. Bates, Kahle, & Stulz (2009) find that the average cash-to-assets ratio of U.S firms has increased significantly since 1980 Their finding has received considerable attention in finance literature. We compare the increase in the cash-to-assets ratios between these industry groups by controlling for the proxies of precautionary motives, agency costs, and corporate governance. Bates et al (2009), Denis & Sibilkov (2010), Harford et al (2008), He & Wintoki (2016), and McLean (2011) report that large cash reserves are due to the precautionary motive, agency costs, corporate governance, and share issuance. We extend their studies by controlling for these proxies between healthcare and technology industries and other industries.
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