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Cash Holdings, Investment, and Firm Dynamics

Paper Session

Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PST)

Manchester Grand Hyatt, Ocean Beach
Hosted By: International Society for Inventory Research
  • Chair: Pablo Ottonello, University of Michigan

Firm Selection and Corporate Cash Holdings

Juliane Begenau
,
Stanford University
Berardino Palazzo
,
Federal Reserve Board

Abstract

Since the early 1980s, the composition of U.S. public firms has progressively shifted toward less profitable firms with high growth potential (e.g., Fama and French, 2004). We estimate a dynamic corporate finance model to quantify the role of this selection mechanism for the secular trend in cash holdings among US public firms. We find that an increase in the precautionary savings motive-primarily driven by the decline in initial profitability among R&D-intensive new lists explains about 50% of the upward trend in cash holdings. This selection mechanism also explains part of the upward trend in sales growth volatility.

Who Bears Firm-level Risk? Implications for Cash Flow Volatility

Mindy Xiaolan
,
University of Texas-Austin

Abstract

Public firms in the United States that provide better insurance against productivity shocks to their workers experience higher cash flow volatility. The difference in intra-firm risk sharing between workers and capital owners accounts for more than 50% of the variation in firm-level cash flow volatility. I develop a theory in which wages can serve either as a hedge or as leverage, depending on the history of the productivity shocks the firm has faced. Heterogeneous roles of workers in the firm are derived by analyzing the dynamic equilibrium wage contracts between risk-neutral owners and risk-averse workers who can leave the firm with a fraction of accumulated human capital. Owners of the firm will optimally bear more risk when the current value of the firm’s human capital is lower than the peak value it has reached. The model explains the joint dynamics of cash flow volatility and the wage-output sensitivity. Also, the model produces predictions for the dynamics of cash flow volatility that are consistent with the time series properties of the firm-level data.

Customers and Retailer Growth

Peter Klenow
,
Stanford University
Liran Einav
,
Stanford University
Jonathan D. Levin
,
Stanford University
Raviv Murciano-Goroff
,
Boston University

Abstract

Using the universe of Visa debit and credit card transactions in the U.S. from 2007–2017, we document the paramount importance of customers in accounting for sales variation across merchants, across stores within retail chains, and over time for individual stores. Customers, as opposed to transactions per customer or sales per transaction, consistently account for 80 to 90% of sales variation on these margins. According to a simple growth model in which retailers invest to improve their quality and to access customers, these facts suggest a larger role for entrants and a smaller role for incumbents in driving overall growth than one would infer from retailer life cycle sales alone.
Discussant(s)
Simcha Barkai
,
London Business School
Alessandra Peter
,
Princeton University and New York University
Sara Moreira
,
Northwestern University
JEL Classifications
  • E0 - General
  • G0 - General