Working Paper: NBER ID: w23249
Authors: Juliane Begenau; Berardino Palazzo
Abstract: Among stock market entrants, more firms over time are R&D–intensive with initially lower profitability but higher growth potential. This sample-selection effect determines the secular trend in U.S. public firms’ cash holdings. A stylized firm industry model allows us to analyze two competing changes to the selection mechanism: a change in industry composition and a shift toward less profitable R&D–firms. The latter is key to generating higher cash ratios at IPO, necessary for the secular increase, whereas the former mechanism amplifies this effect. The data confirm the prominent role played by selection, and corroborate the model’s predictions.
Keywords: cash holdings; firm selection; R&D intensive firms
JEL Codes: E3; G1; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| entry of less profitable firms with high growth potential (L26) | increased cash holdings at IPO (G24) |
| sample selection (C34) | increase in cash holdings (G32) |
| shift toward less profitable firms (D21) | increasing cash holdings (G32) |
| turnover ratio (J63) | cash holdings at entry (G19) |
| change in industry composition (L16) | secular increase in cash (G19) |