Keynes’ Finance Motive and Firm Behavior: Empirical Evidence

Abstract

Despite the continued interest among macroeconomists in Keynes' finance motive for holding liquid assets, very little empirical work has been done to support its existence. Since it is difficult to measure aggregate planned investment and properly estimate the appropriate macroeconomic models, it is crucial that testing of the finance motive take place at the microeconomic level. The few empirical studies of firm behavior are inadequate. Many of the accepted practices in the literature on the demand for liquid assets by firms (e.g., controlling for industry and testing for temporal stability) are ignored. The previous studies use aggregated data although many researchers have warned that use of such data can yield misleading conclusions. There is no formal test of whether the finance motive is separate from and additional to the transactions demand for liquid assets. It is also possible that the theoretically appropriate scale variable for the transactions demand never has been used in empirical work. This study seeks to extend current knowledge of the finance motive by better integrating the finance motive into the traditional treatment of the firm demand for liquid assets. This is accomplished by using firm-level data, including statistical controls for a firm's industry and testing if the finance motive is stable over time. A related issue is whether the finance motive is separate from and additional to the transactions motive for holding liquid assets. In addition, this study investigates an issue that has never been addressed: Do subsidiaries of foreign firms behave differently than domestically owned firms?