Precautionary Savings with Risky Assets: When Cash Is Not Cash

Ran Duchin · Thomas Gilbert · Jarrad Harford · Christopher M. Hrdlicka

356 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Markets and Investment Strategies Risk Management in Financial Firms

Abstract

ABSTRACT 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.

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References

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