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Precautionary Savings with Risky Assets: When Cash Is Not Cash
Author(s) -
DUCHIN RAN,
GILBERT THOMAS,
HARFORD JARRAD,
HRDLICKA CHRISTOPHER
Publication year - 2017
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12490
Subject(s) - business , assets under management , debt , equity (law) , finance , cash flow , cash , fixed asset , asset (computer security) , monetary economics , financial system , economics , microeconomics , computer security , production (economics) , political science , computer science , law
U.S. industrial firms invest heavily in noncash, risky financial assets such as corporate debt, equity, and mortgage‐backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of this behavior. Consistent with the model, risky assets are concentrated in financially unconstrained firms holding large financial portfolios, are held by poorly governed firms, and are discounted by 13% to 22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.