Precautionary Savings Research Articles

Corporate financialization and export product quality: evidence from China

We examine the impact of corporate financialization on export product quality using data from Chinese A-share listed companies from 2000 to 2015. Our findings indicate that corporate financialization inhibits the upgrading of export product quality through ‘innovation crowding out’ and ‘factor substitution’ effects. Heterogeneity tests reveal that this negative effect is pronounced for firms with strong motivations for market arbitrage, precautionary savings, tunneling, as well as higher managerial overconfidence. Additionally, firms exporting to high-income countries, engaging in general trade in less digitally developed regions, and adopting compensation incentives are more susceptible to the disincentive effects of corporate financialization on export product quality.

The unintended consequence of environmental centralization: Evidence from firm financialization

This study examines the influence of environmental re-centralization, specifically the Vertical Management Reform (VMR) in China, on the investment decisions of polluting firms. Using a staggered difference-in-differences approach, we find that the VMR significantly increases the allocation of resources to financial assets by 12.7 %, accelerating the financialization of polluting firms. The mechanism analysis shows that environmental centralization enhances regulatory enforcement and reduces governmental support, tightening corporate financial constraints. The motivation for firm financialization can be explained by investment substitution rather than precautionary savings. We further show that private firms, firms with more tightened financial constraints and firms with fewer assets become more financialized following the centralization reform. Moreover, the impact on firm financialization diminishes with the distance from provincial capital cities. We reveal the unintended consequence of environmental centralization on firm financialization and provide meaningful implications for changes in institutional arrangements.

China’s public long-term care insurance and risky asset allocation among elderly households

China’s elderly households are characterized by higher holdings of cash and cash equivalents and lower holdings of stocks and bonds in their financial portfolios. We utilize the public Long-term Care Insurance (LTCI) reform and data from the China Health and Retirement Longitudinal Study (CHARLS) to examine how LTCI coverage affects risky asset holdings among newly insured elderly households. Employing a difference-in-differences methodology, our findings reveal that LTCI significantly increases the share of risky assets in the financial portfolios of older families. The increased preference for risky assets may be a result of a weakening incentive for precautionary savings. Decomposing risky assets into bonds and stocks, we find that the increase in the share of risky assets following the LTCI pilot comes mainly from bond investments rather than stocks, which indicates that LTCI has a limited effect on risk asset holdings among the Chinese elderly. Our study contributes to understanding the economic impacts of China’s public LTCI by showing that LTCI may lead to changes in asset allocation strategies among elderly households.

Does purchasing commercial insurance promote household consumption? Evidence from China

Consumption is an important factor driving China's economic growth. Although China's per capita GDP is approaching the threshold of high-income countries, the household consumption rate remains significantly low. One of the main reasons for weak household consumption is the imperfect social security system, and the complementary role of commercial insurance should be fully utilized. Based on existing research, which primarily assesses the positive effects of commercial insurance, this paper focuses on whether commercial insurance can promote household consumption. Using the 2017 and 2019 waves of the China Family Finance Survey (CHFS) data, this paper conducts empirical research with a high-dimensional fixed effects model, performing endogeneity and robustness tests. The results show that commercial insurance has a significant positive effect on household consumption. Mechanism analysis reveals that purchasing commercial insurance significantly reduces households' precautionary savings and liquidity constraints, thereby releasing their purchasing power and ultimately increasing household consumption. The heterogeneity analysis indicates that the promotion effect varies across different regions, household registrations (urban or rural), health statuses, and the marital status of sons in the household. The research findings provide evidential support for the government to further encourage and promote the development of commercial insurance.

Community-based elderly home care services policy and household consumption enhancement: Evidence from China

The influence of elderly consumption is increasing, and community-based elderly home care service (CEHCS), as an important social security system, will have a significant impact on household consumption levels and consumption structure. This paper utilizes data from five batches of CEHCS pilot policies implemented in China from 2016 to 2020, combined with data from the China Health and Retirement Longitudinal Study (CHARLS) from 2011 to 2020, to design a dynamic difference-in-differences model to systematically evaluate the dynamic effects and mechanisms of CEHCS on elderly household non-durable goods consumption. The study found that after the coverage of CEHCS, the consumption levels of non-durable goods such as clothing, daily necessities, and cultural and entertainment products in middle-aged and elderly households significantly increased year by year, while consumption of durable goods significantly decreased. Moreover, the impact of CEHCS was more pronounced in households with lower housing assets and rural households. Mechanism analysis suggests that CEHCS promote the increase in non-durable goods consumption by alleviating children's labor constraints, reducing the family's caregiving burden, and diminishing precautionary savings. This paper provides further empirical evidence on the pathways through which elderly care services influence household consumption behavior, which holds significant implications for proactively addressing population aging and unlocking household consumption potential through micro-institutional design.

Online judicial auction, loan availability, and corporate investment in China

Online judicial auctions can significantly impact corporate investment by enhancing creditor protection and facilitating loan availability. Using a dynamic difference-in-differences strategy, we find that the reform significantly boosts corporate investment. Mechanism tests reveal that the reform boosts corporate investment by improving corporate loan availability and creditors' willingness to lend. The effect is more pronounced in regions with high judicial auction turnover, high public participation, poorer legal environments, and lower banking competition, suggesting that these reforms enhance legal system efficiency and market competition. Additionally, we find that judicial auction reform reduces firms’ precautionary savings and fosters regional economic development. Overall, our study contributes to understanding the important role of creditor protection in corporate investment and provides insights for implementing digital judicial reforms.

Consumption dynamics with law of small numbers

We propose an intertemporal consumption-saving model by exploring the implications of the Law of Small Numbers (LSN), a belief heuristic stating that any sample realization of a population should be representative of the population. First, the existence of the LSN reduces the precautionary savings demand. More importantly, we show that the LSN belief structure provides an alternative explanation for two fundamental anomalies in consumption theory: (1) excess sensitivity by showing that past changes in income predict future changes in consumption; and (2) excess smoothness by lowering consumption volatility and generating the empirical magnitude.

Shareholder value orientation, corporate cash piles, and the myth of financial accumulation

Financialization scholars argue that the growing financial balance sheets of non-financial corporations indicate a “financial turn in accumulation” driven by the rise of shareholder value orientation (SVO). In this paper, I test whether greater shareholder influence or shareholder-aligning managerial incentives can explain the more rapid accumulation of financial assets among US NFCs. I find that shareholder power is associated with some increase in short-term financial assets but only in the case of certain shareholder types, in particular high turnover institutional investors. The magnitudes of the effect are small however, and only pertain to smaller firms. Moreover, ownership concentration by these impatient investor types is declining. The results suggest that changing corporate governance patterns have little capacity to explain balance sheet financialization. I argue that mainstream accounts focused on the precautionary savings of new, research-intensive firms and tax arbitrage amongst multinationals offer a better explanation for growing financial balances than the financial accumulation hypothesis. Neither of these imply a substitution of financial for real investment, which calls into question an important mechanism thought to connect financialization to secular stagnation and rising inequality.

The impact of infectious disease experience on household consumption: evidence from rural China.

The issue of low consumption among rural households in China has a longstanding history, and the experience of infectious diseases may exacerbate the existing challenges in fostering consumption growth. However, studies that characterize the impact of infectious diseases on household consumption are limited in China. This study aims to explore rural household consumption responses to infectious diseases post-assessment, and identify the underlying mechanisms. A total of 1,539 rural households from China Family Panel Studies (CFPS) datasets of 2014, 2016, 2018, and 2020 were recruited as the study sample. The presence of infectious disease experience was employed as the independent variable and household consumption as the dependent variable. A panel fixed effects (FE) regression model was initially employed to identify the influence of infectious disease experiences on rural household consumption. The instrumental variable (IV) method was used to address potential endogeneity between independent and dependent variables. Robustness checks such as Propensity Score Matching (PSM) test were employed to ensure the reliability of the findings. The results reveal a statistically significant negative impact of infectious disease experiences on consumption over time, becoming no more significant at around 7-9 years post-disaster. This effect leads to more pronounced consumption deprivation for households with limited health insurance coverage and heightened healthcare resource constraints. The mechanism test indicates that infectious disease experiences affect the consumption levels of rural households through channels that include income constraints, the crowding-out of healthcare expenditure, and risk perception, with the precautionary savings motive acting as a moderator. Furthermore, the diminishing effect of infectious diseases on individual consumption surpasses that of natural disasters. Temporal discrepancy is observed in the impacts of infectious and chronic disease shocks on household consumption. The accumulation of liquid assets emerges as an effective strategy for households to mitigate the impact of infectious disease shocks. The findings underscore the importance of integrating short- and long-term policies to bolster consumption capacity, strategically allocate inter-regional medical resources, and fortify the resilience of rural households against economic risks.

Who Are the Hand-to-Mouth?

Abstract Many households hold little wealth. In standard precautionary savings models, these households should not only display higher marginal propensities to consume (MPCs) but also higher future consumption growth. In contrast, we see from the Panel Study of Income Dynamics that such “hand-to-mouth” households do not display higher growth in spending. They also exhibit greater volatility of spending and adjust their spending to a greater extent through the number of categories consumed. Consistent with a role for preference heterogeneity, the panel data show that it is persistent differences across households, not current assets, that predict low consumption growth and other spending differences for the hand-to-mouth households. To identify the extent of preference heterogeneity, we consider the model of Kaplan and Violante with both liquid and illiquid assets, but allow heterogeneity in preferences. To match the data, many poor hand-to-mouth must be relatively impatient and have a high inter-temporal elasticity of substitution. The model shows that preferences predominantly explain the higher MPCs for low-asset households. Preference heterogeneity notably increases the spending impact of fiscal transfers, but only if targeted, while reducing that from interest rate cuts.

Economic environment uncertainty and financialization of real estate firms

This paper investigates the impact of economic environment uncertainty on real estate firms' financialization and explores the underlying mechanisms. This paper utilizes data from listed real estate firms from 2011 to 2021, focusing on the rationale for firms' financialization. In contrast to prior literature, this study employs the macro-level economic uncertainty index and the micro-level uncertainty perception measures to gauge economic environment uncertainty. The findings indicate that an increase in economic environment uncertainty leads to a greater inclination of firms to engage in financialization, driven by the "precautionary savings" motivation. Furthermore, this effect is primarily driven by the firm-level perception of uncertainty in the external environment. Mechanisms tests demonstrate that when there is uncertainty in the economic environment, corporations are more likely to engage in financialization, primarily due to decreased CEO overconfidence and reduced corporate risk-taking. Moreover, the level of financing constraints and executives with financial expertise contribute to the heterogeneous effects of uncertain economic conditions on real estate firms' financialization. Firms with high financing constraints and financial background executives are more likely to engage in and enlarge investments in financial assets, while firms without financial background executives are not. Furthermore, there is no notable correlation between the level of financialization of state-owned enterprises and policy fluctuations in the economic environment. The findings provide valuable insights for businesses to explore alternative paths for growth, raising awareness among government regulators about the risks associated with financialization.

Even imprudent risk lovers may engage in precautionary saving

Recent developments in dynamic consumption theory have shown that risk-loving agents, much like their risk-averse analogues, can exhibit downside risk aversion (prudence) and thus demand precautionary savings. I complement this finding by showing that risk-seeking preferences also magnify the role of natural borrowing limits in shaping consumers’ behavior, causing risk lovers to increase savings against income uncertainty in cases where risk averters would not: even imprudent risk lovers may engage in precautionary saving.

Urban-Rural Health Insurance Integration and China's Rural Household Savings.

A linchpin to realizing the internal circulation (referring to the domestic cycle of production, distribution and consumption) is reducing residents' saving rate and expanding the domestic needs. However, rural residents in China demonstrate a strong propensity to save money. In light of practical characteristics of urban-rural health integration promoted in different places, the three-phase data (from 2014 to 2018) and the dual difference-in-differences model of the China Labor-force Dynamics Survey (CLDS) are used to empirically investigate the impact of urban-rural health insurance integration on rural household savings. Research reveals that urban-rural health integration can reduce the health risks and medical risks facing rural households, thus weakening the motivation of precautionary savings. The analysis of heterogeneity reveals that the integration of urban-rural health insurance significantly influences the savings rates of households headed by older individuals, particularly women, with lower levels of educational attainment. Besides, the single-tier health insurance system can have a more significant impact, whereas the multi-tier insurance system may not significantly affect the savings rate. Based on the aforesaid research conclusions, this article believes that in order to reduce the savings rate of rural households and expand consumption, the health insurance system should be further improved.

Do paid maternity leave mandates affect corporate cash holdings?

This study examines whether paid maternity leave laws affect corporate cash holdings. Using a difference-in-differences approach, we find the staggered introduction of these laws significantly reduce firm cash reserves, especially in labor-intensive industries. Further analysis indicates that increased employee productivity post-adoption associates with declining cash holdings, representing a channel linking these laws to precautionary savings motives.

Nontraded Sector Growth Risks and Economic Sizes in International Asset Pricing

Output fluctuations in nontraded sectors are an important country-specific risk factor because nontraded outputs are only consumed domestically. In interest rate markets, countries with higher nontraded output growth risks are associated with stronger motives for precautionary savings and lower interest rates. In currency markets, strategies with higher exposures to nontraded output growth risks offer higher average excess returns. Economic sizes play an important role in exacerbating the pricing impact of nontraded output growth risks as it requires larger international trades to mitigate nontraded output risks of larger economies. However, because economic sizes are functions of outputs in equilibrium, output growth risks also explain this role of economic sizes in international asset pricing. This paper was accepted by Agostino Capponi, finance. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.03697 .

Risk factors disclosure and corporate philanthropy

The disclosure of risk factors indicates that firms face uncertainties in their future development. Simultaneously, the revelation of such information can elevate investors' risk perception, potentially leading to the propagation of panic in the market. Consequently, risk factors disclosure may manifest in two distinct effects on corporate philanthropy behaviors. Firms might reduce their levels of charitable giving as a precautionary savings measure, or conversely, they may increase contributions motivated by self-interest. In this study, we investigate the impact of risk factor disclosure on corporate philanthropy. Our findings suggest that companies tend to escalate their corporate philanthropy efforts as a strategic response to mitigate the adverse effects of heightened risk factors disclosure. Moreover, this effect is more pronounced for firms operating in environments characterized by lower external information quality, tightened financing constraints, and increased market uncertainty. Further analysis reveals that the primary influence stems from the disclosure of internal risk factors rather than external ones. Additionally, our finding indicates that corporate philanthropy significantly mitigates the negative impact of risk factors disclosure on the liquidity of the firms' stock.

Do the poor save more? Evidence from natural disasters and household savings in China

One defining feature of China’s economy has been its extremely high domestic savings over the past few decades. This study sheds new light on natural disasters and aims to investigate the impacts of natural disasters on household savings. We find that natural disasters significantly increase household savings. On average, one additional disaster-related unexpected death per 1,000 populations corresponds to an increase of 12.1% in household savings, which is translated into an increased household savings of 724 million Chinese Yuan per county and 4,957 Chinese Yuan per household. Moreover, the effect of natural disasters can be explained through income vulnerability and experience spreading channels. Finally, the heterogeneity analysis reveals that regions with better infrastructure, medical and welfare resources withstand lesser negative disaster shocks on precautionary savings. It thereby emphasizes that a growing economy must be matched with a good design of infrastructure and social facilities to cope with the growing frequency of natural disasters, especially in the developing world.

Firms’ Precautionary Savings and Employment during a Credit Crisis

Can the macroeconomic effects of credit supply shocks be large even when a small share of firms is credit constrained? I use UK firm-level accounting data to discipline a heterogeneous-firm model where the interaction between real and financial frictions induces precautionary cash holdings. In the data, firms increased their cash ratios during the Great Recession, and cash-intensive firms displayed higher employment growth. A tightening of firms’ credit conditions generates the same dynamics in the model. Unconstrained firms preemptively respond to credit supply shocks; this precautionary channel, when appropriately quantified, crucially matters for the aggregate dynamics and firm-level patterns. (JEL D22, E24, E32, E44, G32)

Carbon taxation and precautionary savings

Carbon taxation and precautionary savings

Natural Disasters and Capital Accumulation: The Role of Precautionary Saving and Capital Market Openness

Natural Disasters and Capital Accumulation: The Role of Precautionary Saving and Capital Market Openness