The Corporate Propensity to Save

Leigh A. Riddick · Toni M. Whited

711 citations0/0 files storedThe Journal of Finance

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Corporate Finance and Governance Financial Analysis and Corporate Governance Working Capital and Financial Performance

Abstract

ABSTRACT Why do corporations accumulate liquid assets? We show theoretically that intertemporal trade‐offs between interest income taxation and the cost of external finance determine optimal savings. Intriguingly, we find that, controlling for Tobin's q , saving and cash flow are negatively related because firms lower cash reserves to invest after receiving positive cash‐flow shocks, and vice versa. Consistent with theory, we estimate negative propensities to save out of cash flow. We also find that income uncertainty affects saving more than do external finance constraints. Therefore, contrary to previous evidence, saving propensities reflect too many forces to be used to measure external finance constraints.

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References

1973Risk, Return, and Equilibrium: Empirical Tests 1997Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?1999The determinants and implications of corporate cash holdings 2004The Cash Flow Sensitivity of Cash 2006Corporate governance and the value of cash holdings 2006Corporate Financial Policy and the Value of Cash 1989Dynamic Capital Structure Choice: Theory and Tests 1998The Determinants of Corporate Liquidity: Theory and Evidence

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