Marketable Securities: Storage or Investment?

August 21, 2013

Craig O. Brown*

NUS Business School

National University of Singapore

Abstract
Corporate liquidity demand models view investments in marketable securities as a relatively
simple store of excess liquidity (the storage view). However, compared to excess cash, market
investment has more in common with general investment and liability-driven investment. For
firms with repatriation tax exposure, constrained to a limited payout and permanent foreign
capital reinvestment, the average coefficient difference between excess cash and market
investment regressions is zero. For all firms, the difference is 12%. The findings suggest that
market investment is no longer a passive store of excess liquidity. Rather, market investment is
associated with active general investment and liability-driven investment.

Keywords: Market Investment, Liability-Driven Investment, Payout Policy, International

Taxation.

JEL Codes: G11 (Portfolios), G31 (Investment), G32 (Risk Management), G35 (Payout Policy)

*
Craig O Brown, Department of Finance, NUS Business School, 15 Kent Ridge Drive, BIZ 1, #07-61 Mochtar
Riady Building, Singapore 119245. Phone: +65 6516-6815. Fax: +65 6779-2083. U.S. Phone: (213) 221-3582.
Email: bizcb@nus.edu.sg. I am grateful to Turan Bali, Michael Faulkender, Jack Francis, Andra Ghent, Todd
Gormley, Gerard Hoberg, Armen Hovakimian, Sheng Huang (NUS RMC discussant), Dirk Jenter, Anzhela
Knyazeva, Diana Knyazeva, Ralph Koijen, Albert (Pete) Kyle, Vojislav Maksimovic, Nagpurnanand Prabhala,
David Scharfstein, Lemma Senbet, Paolo Sodini, Per Strömberg, Heather Tookes, Bernard Yeung, and seminar
participants at Baruch College, National University of Singapore, Nanyang Business School, the Stockholm School
of Economics, HEC Lausanne, the University of Maryland (Smith), and the NUS Risk Management Conference for
helpful comments.
1. Introduction

The standard measure of corporate liquidity is heterogeneous1 and includes short-term

investments in marketable securities (or current market investment). Like corporate liquidity,

market investment (current and noncurrent) is substantial.2 In making investments, a growing

number of corporate managers are reaching for yield3 (Rajan, 2010; Becker and Ivashina, 2012)

and modern firms actively trade investment portfolios. For example, Google has its own trading

floor;4 and Apple’s dedicated subsidiary, Braeburn Capital,5 manages Apple’s liquid assets.

Contrary to the recent anecdotal evidence, money-demand research suggests that market

investment is a relatively simple store of excess cash.6 Moreover, this storage view is consistent

with all modern corporate liquidity management models that emphasize the role of managerial

agency costs (Jensen, 1986); the tax motive (Foley et al., 2007; Dharmapala, Foley, and Forbes,

2011); the precautionary motive and the role of financial constraints (Kaplan and Zingales,

1997). Does the modern firm conform to the passive storage view? Or are managers more active

when investing in marketable securities? Is market investment a simple store of excess cash? Or

do managers pursue investment goals when placing funds in marketable securities?

1
The measure consists of three components: physical currency (or cash) and cash equivalents, credit lines (Yun,
2009; Acharya, Almeida, and Campello, 2010; Campello et al., 2011; Lin, Servaes, and Tufano, 2010), and short-
term investments in marketable securities.
2
Market investment, consisting of equity and debt securities, can constitute well over 30% of total assets for many
nonfinancial corporations (or firms). When including noncurrent corporate market investment in the measure of
liquid assets, it is not cash (42%) that constitutes the majority of liquid assets for firms that make market
investments; it is corporate market investment (58%). This 58% consists of 28% noncurrent market investment and
30% current market investment. However, we know relatively little about marketable securities beyond our
knowledge of overall corporate liquidity (Opler et al., 1999) and noncurrent market investment tied to strategic
equity stakes (Allen and Phillips, 2000; Ouimet, 2013).
3
Katy Burne, “Google Googles for Yield, Finds Auto Bonds,” The Wall Street Journal, August 7, 2012.
4
Douglas MacMillan, “Google’s Latest Launch: Its Own Trading Floor,” Bloomberg Businessweek, May 27, 2010.
5
Charles Duhigg and David Kocieniewski, “How Apple Sidesteps Billions in Taxes,” The New York Times, April
28, 2012.
6
Money-demand research suggests that corporate market investment is a simple substitute for cash (Selden, 1961;
Maddala and Vogel, 1967; Jeffers and Kwon, 1969) or a store of excess cash (Miller and Orr, 1966, 1968). In fact,
Miller and Orr (1968) “followed their (Baumol and his followers) precedents in assuming that earning assets are
homogenous” and admittedly ignored “the importance that runoffs from the portfolio can have in cash balance
management.”

2
 The storage view has roots in pre-1960 studies of corporate market investment (Chudson,

1945; Frazer, 1958), and should be qualified for modern firms given the change in investment

behavior over time. Prior to 1960, mostly “safe” investments (Krishnamurthy and Vissing-

Jorgensen, 2010; Gorton, Lewellen, and Metrick, 2012) were held by firms; firms held roughly

75% of their marketable securities in US Treasuries with approximately 67% of their marketable

securities maturing in one year or less (Jacobs, 1960). Over time however, managers of firms

have been investing less in short-term US Treasuries, and more in other types of securities

(Jacobs, 1960; Heston, 1962). Given these changes in investment scope, this paper examines the

storage view for the modern firm.

This paper presents two alternatives to the storage view. In doing so, this paper provides

a scientific basis for meaningful economic differences between excess cash and marketable

securities. The first alternative is that managers invest in marketable securities with goals similar

to those of capital investment (general investment). The general investment motive is consistent

with the speculative motive (Keynes, 1936), portfolio choice (Tobin, 1955), tax arbitrage (Scott,

1979), and agency costs7 (Jensen, 1986). The second alternative is that managers invest in

marketable securities to manage future financial commitments and promises. The practice is

commonly described as asset-liability management (ALM) or liability-driven investment8 (LDI)

(Miller and Orr, 1967; van Binsbergen and Brandt, 2009; Ang, Chen, and Sundaresan, 2012).

7
Although the general investment motive is consistent with an agency cost of free cash flow, this paper is the first
paper to discuss modern-firm speculation with investments in marketable securities as opposed to speculation with
capital investments or acquisitions.
8
Miller and Orr (1968), referring to their research on CFOs, argue that “in practice corporate financial officers may
rely heavily on (portfolio) runoffs as a means of replenishing the firm’s cash balance (see Miller and Orr, 1967). The
policy becomes oriented toward anticipation of heavy future requirements and the purchase of securities of a
maturity to match these requirements in time. To the extent that cash flows are predictable in timing and magnitude,
this kind of reliance on runoffs to meet cash needs may be economical.”

3
 This paper first shows that marketable securities are associated with variables that, given

the alternatives to the storage view, might not explain market investment and cash in the same

manner: variables related to payout policy, interest, and investment9 (PII).

In studying whether market investment is simply a store of excess cash, the appropriate

empirical method is not as straightforward as a single ordinary least squares (OLS) regression.

This paper first estimates excess cash, then uses coefficient differences10 between excess cash

regressions and market investment regressions (for PII variables).

To test the validity of this paper’s method, I use a natural experiment that focuses on

firms that are constrained to conform to the storage view: multinational corporations (MNCs)

that maintain liquidity offshore because of the taxes associated with repatriation. MNCs have the

flexibility to shift profits to low-tax locations (Harris et al., 1993; Hines and Rice, 1994; Desai,

Foley, and Hines, 2006). Moreover, MNC liquid profits can remain offshore and “trapped”

because of the taxes associated with repatriation (Foley et al., 2007). Trapped-liquidity firms are

typically constrained to hold excess cash as market investments in lieu of a payout to

shareholders (Dharmapala, Foley, and Forbes, 2011). Moreover, to avoid a deferred tax liability,

firms must convince auditors and the tax authorities that foreign income will be permanently

reinvested in capital projects11 (Edwards, Kravet, and Wilson, 2012; Blouin, Krull, and

Robinson, 2012). These features limit the scope for market investment as LDI and general

investment. In an environment where general investment and LDI distinguish market investment

9
This paper uses capital expenditure (speculative motive) and the corporate tax rate (tax arbitrage) as variables to
address the first alternative to the storage view (general investment). This paper uses long term interest expenses and
dividend payout as variables to address the second alternative to the storage view (LDI).
10
For each model (excess cash and market investment), there might be model misspecification. However by using
relative analysis, the regression-difference method is more robust to model misspecification when compared to a
single-regression method.
11
Victor Fleischer, “Overseas Cash and the Tax Games Multinationals Play,” The New York Times DealBook,
October 3, 2012. The accounting exception, FASB Accounting Standards Codification (ASC) 740-30-25-17, states
“A parent entity shall have evidence of specific plans for reinvestment of undistributed earnings of a subsidiary
which demonstrate that remittance of the earnings will be postponed indefinitely.”

4
from excess cash, managers of trapped-liquidity are likely to be constrained to conform to the

storage view.

Consistent with the presence of a limited payout and constrained investment, for trapped-

liquidity firms, coefficients for the PII variables do not differ between excess cash regressions

and market investment regressions. However, for all firms, the average absolute coefficient

difference between excess cash regressions and market investment regressions (for PII variables)

is 12%.12

This paper is primarily related to the literature on the determinants of marketable

securities (Jeffers and Kwon, 1969) and liability-driven investment (van Binsbergen and Brandt,

2009; Ang, Chen, and Sundaresan, 2012). This paper is also related to the literature on money

demand (Barro and Fischer, 1976; Frenkel and Jovanovic, 1980), money assets (Dang, Gorton,

and Holmstrom, 2009; Krishnamurthy and Vissing-Jorgensen, 2012; Stein, 2012; Sunderam,

2012), corporate liquidity (Eppen and Fama, 1968), and financial flexibility (Gamba and

Triantis, 2008; Denis and Sibilkov, 2010; Denis, 2011; Denis and McKeon, 2012). Finally, this

paper is related to the literature on international taxation (Desai, Foley, and Hines, 2006; Foley et

al., 2007; Graham, Hanlon, and Shevlin, 2011; Dharmapala, Foley, and Forbes, 2011; Blouin,

Krull, and Robinson, 2012; Edwards, Kravet, and Wilson, 2012).

This paper is the first to investigate the storage view of market investment for the modern

firm. In doing so, this paper studies the difference between excess cash and marketable securities

by following a large cross-section of US firms over time. The findings suggest that market

investment is no longer a passive store of excess liquidity. Rather, market investment is

associated with active general investment and liability-driven investment.

12
This paper’s findings also suggest that market investment is not a simple substitute for cash; the average absolute
coefficient difference between cash regressions and market investment regressions is 24%.

5
2. Corporate Market Investments: Definition and Example

What are corporate market investments? What types of market investments does a modern firm

make?

Corporate market investments are recognized by the Financial Accounting Standards

Board (FASB) in the Statement of Financial Accounting Standards (SFAS) No. 11513 as

“investments in equity securities that have readily determinable fair values” and “all investments

in debt securities.” Market investments do not include unsecuritized loans, futures, forwards,

options, or other derivatives recognized by SFAS No. 133. Moreover, market investments do not

include treasury stock from repurchases or consolidated subsidiaries, but can include mortgage-

backed securities and other securitized loans.

Google is a large public corporation in the internet and technology sector. Google’s

investments provide not only a good example of the diversity in the types of marketable

securities, but diversity in the maturity of marketable securities. Exhibit I shows the liquid-asset

amounts for the annual period ending December 31, 2011, the firm has total assets of

approximately $72.6 billion. The firm’s cash holding excluding cash-equivalent marketable

securities is equal to approximately $4.7 billion. The firm’s total market investment (excluding

cash-equivalent marketable securities) is equal to approximately $34.6 billion. Its market

investment as a percentage of net assets (total assets minus cash minus cash-equivalent securities

minus market investments) is equal to approximately 124%. The largest component of Google’s

market investment consists of US government notes ($11.6 billion), which make up

approximately 41% of net assets. Google’s market investments also include municipal securities

($1.8 billion), corporate debt securities ($6.1 billion), equity securities ($307 million), and

13
SFAS No. 115 supersedes SFAS No. 12. SFAS No. 12 presents a standard for equity security accounting and the
conditions under which equity investments should be recorded at cost or at market value.

6
agency residential mortgage-backed securities ($6.5 billion). Of the $34.3 billion of non-cash

equivalent debt marketable securities, $13.2 billion worth is due within 1 year (38.6%), $7.5

billion worth is due between 1 year and 10 years (21.8%), and $8.1 billion worth is due after 10

years (23.6%). Google obviously has a flexible investment policy: Google is not limited to

investing a moderate amount of funds in short-term US Treasuries.

3. Aggregate Market Investments: Size and Risk

To understand the change in corporate market investment practices over time, this section

presents evidence of the trend in aggregate market investment size, and the change in the

aggregate portfolio composition over time.

Taking data from the Flow of Funds Accounts, Table I shows the time-series means of

various types of market investment for three separate periods: Period 1 (1945 to 1964), Period 2

(1965 to 1984), and Period 3 (1985 to 2005). Period 1 firms place approximately 84% of their

investible funds in US Treasury securities,14 and on average, market investments are equal to

approximately 8% of tangible assets. The Period 2 aggregate investment portfolio is more

diverse than the Period 1 portfolio; investments in US Treasury securities comprise only 16.2%

of all Period 2 market investments. On average, approximately 57% of all Period 2 market

investments are classified as unidentified miscellaneous financial assets, with total market

investments being equal to approximately 12% of tangible assets. Finally, Period 3 market

investments are equal to approximately 53% of tangible assets, with over 90% of investments

being classified as unidentified miscellaneous financial assets.

Figure I shows the aggregate real amounts of market investments by asset class

(excluding unidentified miscellaneous financial assets) for the years 1945 to 2008. In 1945,
14
Jacobs (1960) uses a survey method to show the various market investment components of a pre-1960 sample of
corporations. He states that pre-1960 firms place most of their investible funds in government debt. In addition, he
alludes to the progression towards a higher non-Treasury component.

7
private firms invested $200 billion (2005 dollars) in US Treasury securities. Over the years,

firms invested less in US Treasuries and more in other asset classes; in 2008, private firms

invested $200 billion (2005 dollars) in mutual funds. Over the years, the aggregate amount

invested in unidentified miscellaneous financial assets (or “other” financial assets) dwarfs the

amount invested in all identified market investments. In 2008, private firms invested over $6

trillion (2005 dollars) in unidentified miscellaneous financial assets. Figure II shows the extreme

change in the portfolio composition; in 1945, approximately 100% of the aggregate corporate

market investment portfolio consisted of US Treasury securities. In 2008, approximately 100%

of the aggregate corporate market investment portfolio consisted of unidentified miscellaneous

financial assets.

4. Related Literature and Hypothesis

This section discusses the related literature and presents this paper’s hypothesis. This paper’s

hypothesis is informed by models of liquid-asset demand15 (buffer-stock models and inventory

models) and the motives associated with corporate liquidity management. The current literature

on corporate liquidity management describes the associated motives for all liquid assets (Opler et

al., 1999; Bates, Kahle, and Stulz, 2009). However, the literature does not address the treatment

of the two forms of liquid assets (cash and marketable securities). To understand the two forms, I

review an older literature on liquid asset demand (Patinkin, 1956, Miller and Orr, 1966).

Buffer-stock models explain the demand for all liquid assets (Patinkin, 1956). In a buffer-

stock model, the manager determines the optimal amount of liquid assets to maintain, given

various motives: the precautionary motive, the transactions motive, the tax motive, the agency

cost motive and other motives associated with corporate liquidity management.

15
In the liquid-asset demand literature, short-term investments in marketable securities are often described as money
assets.

8
 Inventory models explain the demand for physical currency (or cash) by firms (Baumol,

1952; Tobin, 1956; Miller and Orr, 1966, 1968; Eppen and Fama, 1968; Constantinides, 1976),

given that managers can maintain liquid assets in two forms: cash and money assets. In an

inventory model, the manager recognizes the two forms, but is concerned only with determining

the optimal amount of cash to maintain over the course of the operating period. Inventory models

are silent on the optimal amount of money assets.16

Buffer-stock models and inventory models recognize investments in marketable

securities as a passive dependent (residual) action. The models do not acknowledge the

investment in marketable securities as an active independent managerial decision. For a manager

who is unconcerned about the form of liquid asset, buffer-stock models recognize market

investments as being substitutes for cash.

For a manager who would like to determine the optimal demand for cash given that

deterministic17 and stochastic18 factors can influence the transfer between cash and money assets,

inventory models recognize market investments as money assets: the residual after the manager

takes the primary action (cash allocation). If, within bounds, cash is recognized as expected cash

16
Tobin argues that money assets are those that are “marketable, fixed in money value, and free of default risk.”
Other assets such as corporate equity are not applicable in the cash-demand framework. These assets would fall in
the category of general investment (Tobin, 1955; Scott, 1979). See Sprenkle (1969) for his assumption that even
current market investments are made with the speculative motive in mind.
17
When cash flows are deterministic, Baumol (1952) argues that optimal cash demand comes about as an allocation
decision between a cash account and an account of money assets. Tobin (1955) declares that “cash is by no means
the only asset in which transactions balances may be held. Many transactors have large enough balances so that
holding part of them in earning assets, rather than in cash, is a relevant possibility… these holdings are always for
short periods.” Baumol declares that the optimal amount of cash is that which minimizes transaction costs
(brokerage costs and savings-yield opportunity costs). Controlling for year effects (or the savings-yield opportunity
cost), in a Baumol-Tobin model, it is possible that market investments are viewed as money assets and will only
differ from cash based on variables that measure per-unit brokerage costs. Given the economies of scale in
brokerage costs, cash should decrease with size (or as per-unit brokerage costs decline). If market investments are
money assets, then market investment should increase with size, but should be equivalent to cash otherwise.
18
When cash flows are stochastic, Miller and Orr (1966, 1968) argue that transfers between the cash account and the
investment account will be triggered by boundary conditions (upper and lower). In a Miller-Orr model, a variety of
factors and motives can affect the optimal demand for cash. In the corporate liquidity management literature, the
optimal amount of liquid assets is determined given various managerial motives (Opler et al., 1999; Bates, Kahle,
and Stulz, 2009). The Miller-Orr model predicts that upon meeting an upper bound for its cash balance, a firm will
distribute cash, retire debt, or transfer excess cash to the investment account.

9
(or optimal cash) and if the positive difference between observed cash and expected cash is

recognized as excess cash (or the cash in excess of optimal cash), then market investment should

share the same determinants as excess cash. This behavior occurs because market investment is a

relatively simple store of excess cash.

The minor role that market investment plays in buffer-stock models and inventory models

can be characterized as the storage view. The storage view states that market investment is

simply a store of excess cash. Jeffers and Kwon (1969) study the demand for government

securities by firms and find support for the storage view. The authors argue that investment in

government securities is, by and large, low-risk and a simple store of excess cash. However

given the recent changes in market investment size and market investment composition, this

paper examines the storage view for the modern firm.

The first alternative to the storage view is that managers invest in marketable securities

with goals similar to those of capital investment (general investment). In contrast to the storage

view, the first alternative views market investment as the primary action—one that is made with

an objective similar to general investment through speculation (Keynes, 1936), portfolio choice

(Tobin, 1955), or tax arbitrage (Scott, 1979).

If market investments are used in line with general investment19 (Keynes, 1936; Spenkle,

1969), then relative to cash or excess cash, the use of market investment should be increasing in

capital expenditure.

Scott (1979) argues that the storage view is not compelling because many firms hold

larger and riskier investments than what can be explained by cash-management models. Scott

19
Unlike most of his contemporaries, Sprenkle (1969) recognizes that even short-term investments can be
speculative. Sprenkle writes “The rationale for treating observed balances as being essentially transaction balances
was usually that the Keynesian speculative and precautionary balances were undoubtedly very low. Few qualms
were felt about excluding the possibility of speculative cash balances since it was felt that these balances would be
held in short-term assets other than money.”

10
contends that, from a benefit-cost standpoint, market investments20 should be viewed in the same

manner as one views capital investments. In particular, market investment should be evaluated

based on its effect on firm value. He argues that market investment could increase value if there

are substantial tax benefits, as in the case of dividend-paying corporate equity. Scott goes on to

state that market investment can increase value only if it meets the following tax condition.

[1]
1 −  1 − 
> 1 − 

For the tax condition,  is the capital-gains tax rate for the firm’s shareholder,  is the tax rate

on investment income for the firm’s shareholder, and  is the tax rate on investment income for

the firm.  varies with the type of investment and the corporate tax rate. For dividend-paying

corporate equity,  is equal to 1 − 

 , where  is equal to the dividend exclusion rate and 

is equal to the corporate tax rate. For all other taxable investments,  is equal to  . For tax-

exempt investments,  is equal to zero.

If market investments are used for general investment through tax arbitrage, then relative

to excess cash, the use of market investment should be decreasing in the corporate tax rate.

The second alternative to the storage view is that managers invest in marketable

securities to manage future financial commitments and promises. Given the recent changes in the

portfolio composition of market investments and the finding that corporations can use tools other

than derivatives to hedge cash-flow risk (Faulkender, 2005), it could be the case that market

investment is used as a risk management tool.21 In studying risk management, one might not be

20
Scott (1979) argues that because corporations have a tax advantage with respect to dividends, investment in tax-
exempt securities should reduce value, whereas investment in dividend-paying corporate equity should increase
value. In this paper, I attempt to understand the determinants of the amount of market investments (relative to the
determinants of cash and excess cash) more so than the determinants of the composition of market investments.
21
The immediate goal of risk management is to reduce the variability of income, but risk management might have
implications for firm value (Smith and Stulz, 1985). Reduced variability of income can increase value for firms with
a high current tax liability and firms with a high cost of financial distress (Haugen and Senbet, 1978; Shleifer and

11
solely concerned with the motives for risk management, but also concerned with the optimal risk

management tools and with the types of funds that are being managed. When faced with long-

term financial commitments, a manager can practice liability-driven investment22 (LDI) to

reduce the variability of funds used to satisfy these long-term financial commitments (Wallas,

1959; Miller and Orr, 1967; Hoevenaars et al., 2008; Ang, Chen, and Sundaresan, 2012).23

Miller and Orr (1967, 1968) present the LDI motive for marketable securities. In Miller

and Orr (1968) the authors argue that “in practice corporate financial officers may rely heavily

on (portfolio) runoffs as a means of replenishing the firm’s cash balance (see Miller and Orr,

1967). The policy becomes oriented toward anticipation of heavy future requirements and the

purchase of securities of a maturity to match these requirements in time. To the extent that cash

flows are predictable in timing and magnitude, this kind of reliance on runoffs to meet cash

needs may be economical.” In this regard, market investments might be more useful than cash

because market investment returns can be tailored to match returns associated with long-term

financial commitments.

Jagannathan, Stephens, and Weisbach (2000) and Brav et al. (2005) argue that a firm’s

dividend payout behaves like an ongoing commitment and tends to be associated with

sustainable cash flows. Lintner (1956) shows that managers are hesitant to cut dividends and are

exposed to a sharp decline in the stock price when they cut dividends. Hence managers could be

particularly risk averse when it comes to the variability of funds used to satisfy dividends.

Vishny, 1992; Asquith, Gertner, and Scharfstein, 1994). Alternatively, shareholders might not benefit from reduced
variability when managers are risk averse.
22
A popular related literature is the dynamic portfolio choice literature (Campbell and Viceira, 2002).
23
Liability-driven investment (LDI) has long been used by financial intermediaries as a way to manage interest rate
risk (Grove, 1974; Flannery 1981). Moreover, firms with pension liabilities find it useful to structure an asset mix
that maximizes profits given these liabilities (Rauh, 2009; van Binsbergen and Brandt, 2009; Ang, Chen, and
Sundaresan, 2012).

12
 If market investments are used for LDI, then relative to cash or excess cash, the use of

market investment should be increasing in long-term interest expenses and dividends.

5. Empirical Method

This paper examines the storage view by testing the hypothesis that the determinants of market

investment are the same as the determinants of cash or excess cash. To test coefficient

differences between market investment and cash, this paper uses a generalized Hausman test for

differences in coefficients between market investment and cash, for all variables. For excess

cash, this paper uses a novel two-stage method that first partitions variables and estimates excess

cash, then uses a generalized Hausman test for differences in coefficients between market

investment and excess cash, for PII variables only. To get a representative estimate for

coefficient differences, statistically significant coefficient differences are averaged based on the

percentage correlation-ratio weights for cash (or excess cash).

Excess Cash Estimation

To compare the determinants of market investment to the determinants of excess cash,

this paper uses an estimate of excess cash, which is defined as observed cash in excess of

expected cash. Following Opler et al. (1999), this paper uses a Fama-Macbeth regression

procedure to estimate the coefficients for expected cash. The Fama-Macbeth procedure uses

yearly regressions of cash on industry dummies  and core variables  that should determine

expected cash for immediate needs (size, leverage, cash flow, new financing, market-to-book

ratio, and R & D expenses).24 The expected-cash coefficients are obtained by averaging yearly

coefficients,  and  .

[2] ℎ =  ̅ + ̅

24
The specification for the core variables is informed by Opler et al. (1999) and Faulkender and Wang (2006).

13
[3]   =  ℎ − ℎ, 0



Here i=1,…,M is an index for firms, j=1,…,J for industries, and t=1,…,T for time (years).

  are used as the estimates

The non-negative fitted residuals of the Fama-Macbeth regression 

for excess cash.

Variable Partitioning: Core Variables and PII Variables

While the core variables are likely to have an effect on excess cash and market

investments, the use of an excess-cash estimate derived from the core variables could introduce a

bias towards finding differences for the coefficients of the core variables. Therefore to test

whether the determinants of excess cash are the same as the determinants of market investment,

this paper focuses on variables # , outside of the core variable set, which could have a stronger

association with market investment when compared to the corresponding association with excess

cash. These variables for payout, interest, and investment (PII) are those related to liability-

driven investment (dividend payout and interest expense) and general investment (capital

expenditures and the marginal tax rate).

Generalized Hausman Test for Equality of Coefficients

If market investment is a simple substitute for cash, then it should share a common data-

generating process with cash; if market investment is a simple store of excess liquid assets, then

it should share a common data-generating process with excess cash. In order to test whether two

models share the same data-generating process, this paper estimates the simultaneous covariance

matrix of the two estimator vectors for cash (or excess cash) and market investments. A

seemingly unrelated estimation method is used to estimate a simultaneous covariance matrix that

is robust to heteroscedasticity. This seemingly unrelated estimation method is an application of

the general sandwich estimator with clusters (White, 1982).

14
 Consider the following common data-generating process for a common dependent

variable $ under the null hypothesis. Here i=1,…,M is an index for firms, j=1,…,J for

industries, and t=1,…,T for time (years). % is a mean zero noise term.  and  are year and

industry effects. Here & includes both core variables  and PII variables # .

[4] $ = & ' +  +  + %

Given [4], consider N different models—with N estimators—for the same data. Here

k=1,…,N is an index for the different models.

[5] $( = & ')( +  +  + %( , * = 1, … , ,

As an example, consider the case where $ represents excess liquid assets; the split between the

two components of excess liquid assets—excess cash and market investments—is random under

the null hypothesis.25 In this example, there are two models. A common cross-estimator

hypothesis is as follows.

[6] -. : plim ')4 = plim ')5

The hypothesis can be tested using a generalized Hausman test when one estimates a

simultaneous covariance matrix. The generalized Hausman test has a number of advantages over

the traditional Hausman test (Hausman, 1978). For instance, if the data are clustered, the

traditional Hausman test is not defined. In comparing market investments to excess cash, this

paper presents the results of a generalized Hausman test for the equality of coefficients.

Effect-Size-Weighted Average of Absolute Coefficient Differences

Given the generalized Hausman test, rejection can be determined by looking at a set of

coefficient differences. However for a representative estimate of the set, the coefficient

differences can be reduced to an average of absolute coefficient differences. To determine the

25
Alternatively if $ represents the buffer stock, then the split between the two components of the buffer stock—
cash and market investments—is random under the null hypothesis.

15
average coefficient difference between two models, this paper uses a weighted average of

absolute coefficient differences. In the case of cash, I average over all variables; in the case of

excess cash, I average over PII variables only (the variables that are proposed to be related to

market investment for uses other than cash management).

While an equal-weighted average of statistically significant differences seems reasonable,

equal weights lack one important feature. A coefficient difference for a weak determinant should

not be given the same weight as a coefficient difference for a strong determinant. Hence this

paper uses effect-size weights to determine the average absolute coefficient difference.

Using an effect-size-weighted average is more appropriate than using an equal-weighted

average, but there is more than one set of weights: excess-cash weights and market-investment

weights. One can average coefficients based on market-investment weights or excess-cash

weights. Under the null hypothesis, both sets of weights would be the same. However under the

alternative, the weights are different. Given that the hypothesis test carries the burden of

rejection, I report the weighted average coefficient difference based on weights for the given

cash model. For example, in the case of excess cash, the weight for each difference is the

percentage 65 (or correlation ratio) for the PII variables in the excess-cash model normalized by

the sum of all percentage 65 for the PII variables.

6. Data

Aggregate data for private nonfarm nonfinancial corporations are taken from the Flow of Funds

Accounts maintained by the Federal Reserve Board of Governors. Firm-level data are initially

extracted from the Compustat/CRSP merged database for the years 1970 to 2009. I exclude

financial firms (SIC codes between 6000 and 6999), utilities (SIC codes between 4900 and

4999), and foreign firms. I exclude firm-year observations where data are missing or negative for

16
market value of equity (CSHPRI * PRCC_F). I exclude fiscal years that could have been

influenced by the Global Financial Crisis: 2007 to 2009. Finally, I exclude firm-year

observations where data are missing for all of the following items: investments and advances

using the equity method (IVAEQ), investments and advances using the market method (IVAO),

and short-term investments (IVST).

All data are converted to 2006 dollars using a consumer price index (CPI). CPI data are

extracted from the Federal Reserve Economic Data maintained by the Federal Reserve Bank of

St. Louis. The market investments variable is equal to short-term investments plus noncurrent

investments using the equity and market methods. Cash is cash plus short-term investments

(CHE) minus short-term investments. Liquid assets is equal to the market investments variable

plus the cash variable.

Capital expenditure is equal to the capital expenditures of the firm (CAPX). The size

variable is equal to the market value of equity. The cash flow variable is equal to earnings before

interest, taxes, depreciation, and amortization (or EBITDA) minus interest, minus taxes minus

common dividends paid (OIBDP – XINT – TXT – DVC). Leverage is equal to the market debt

ratio, calculated as total debt (DLTT + DLC) divided by the sum of total debt and the market

value of equity. New financing is equal to total equity issuance (SSTK) minus repurchases

(PRSTKC) plus debt issuance (DLTIS) minus debt redemption (DLTR). Short-term debt ratio is

equal to current liabilities (DLC) divided by total debt. Interest expense is equal to the interest

payments of the firm (XINT). The dividend payout is equal to common dividends paid (DVC).

Pension expense is equal to the pension expense of the firm (XPR). The LDI index variable is the

first principal component factor of the dividend payout and pension expense variables. The

repurchase variable is equal to the purchase of the firm’s own common stock and preferred stock

17
minus the redemption of preferred stock (PRSTKC – PSTKRV). R & D expense is equal to

research and development expenditures (XRD) divided by sales (SALE). The market-to-book

ratio is equal to net assets (AT – CHE – IVAEQ – IVAO) minus book equity (CEQ) plus the

market value of equity, all divided by net assets.

The marginal tax rate is a trichotomous variable (Shevlin, 1990; Graham, 1996). The

firm-year marginal tax rate variable is constructed based on taxable income, the top statutory tax

rate, and the net operating loss (NOL) carry-forward (TLCF). Following Graham and Kim

(2009), taxable income is defined as operating income after depreciation plus non-operating

income minus interest expense minus deferred taxes from the income statement (divided by the

top statutory tax rate) plus extraordinary items and discontinued operations (divided by one

minus the top statutory tax rate) plus special items (OIADP + NOPI – XINT – (TXDI/top tax

rate) + (XIDO/(1 – top tax rate)) + SPI). The marginal tax rate is equal to the top statutory tax

rate if taxable income is positive and there is no NOL carry-forward (TLCF is zero or missing).

The marginal tax rate is equal to half of the top statutory tax rate if either the taxable income is

positive or there exists an NOL carry-forward (without both conditions being satisfied). The

marginal tax rate is equal to zero in all other cases. The repatriation tax variable is equal to the

tax costs of repatriating earnings. Following Foley et al. (2007), this variable is computed by

subtracting foreign taxes paid (TXFO) from the product of the firm’s marginal tax rate and the

firm’s pretax income (PIFO).

To explore heterogeneity based on toehold investments in future merger or acquisition

firms, I use a toehold variable (in year t) equal to one if the company completes a merger or

acquisition in fiscal year t + 1, and zero otherwise. Merger and acquisition data are taken from

SDC Platinum for the years 1969 to 2006. To identify firms with multiple segments, I collect

18
segment data from the Compustat annual business segment files. The multiple segment variable

is equal to one if the firm has more than one business segment, and zero otherwise.

All variables other than size, R & D expense, leverage, short-term debt ratio, market-to-

book ratio, the E index, toehold, multiple segment, the LDI index, and the marginal tax rate are

normalized by net assets. All variables are winsorized at the 1% tails to lessen the effect of

extreme values. I also eliminate firm-year observations for which net assets or dividend payout

values are negative. The final sample consists of 108,864 observations for the years 1971 to

2006. The sample summary statistics are presented in Table II.

7. Sample Statistics and Empirical Analysis

Table II presents definitions (in the legend) and lists the summary statistics for variables used in

this study. Market investments, cash, capital expenditures, cash flow, new financing,

repurchases, interest expense, and dividend payout are all normalized by net assets (total assets

minus cash minus market investments).

The market investment distribution is positively skewed with a mean of 21.30%. When

investigating the raw market investment variable, the average amount for market investments is

approximately $156 million in 2006 dollars. For perspective, the average total net assets for a

mutual fund is approximately $300 million (Chen et al., 2004), whereas the average size for a

hedge fund is approximately $80 million (Getmansky, 2004).

The cash distribution is positively skewed with a mean of 19.2%. The mean for capital

expenditures is 9.60% and is similar to the 9% found in Opler et al. (1999). The median for

capital expenditures is 6.20%. The median equity value for firms in the sample is roughly $82.3

million. The median values for cash flow, the marginal tax rate, and the market-to-book ratio are

19
6.80%, 35%, and 1.317. The mean for leverage is 29.50%, which is comparable with the findings

by Opler et al.

Table III presents the estimates of the determinants of cash,26 the determinants of excess

cash, and the determinants of market investments. For ease of exposition, the independent

variables in all regressions are standardized. All specifications include year effects and industry

effects.27 Column (1) uses a specification that includes core variables and PII variables and finds

that for core variables, cash decreases with firm size28 and leverage, but increases with new

financing, the market-to-book ratio, and R & D expenses.

Estimating Excess Cash

To estimate excess cash, the specification in column (2) is limited to core variables only.

In column (2), the Fama-Macbeth coefficients are mostly consistent with the coefficients for the

cash regression in column (1); expected cash (or transactions cash) decreases with firm size and

leverage, but increases with new financing, and the market-to-book ratio. The non-negative fitted

residuals from the Fama-Macbeth regression are used as estimates of excess cash. In column (3),

these residuals are regressed on the core variables and the PII variables. For the PII variables,

excess cash increases with long-term interest expenses and capital expenditure, but decreases

with the corporate tax rate.

26
Research finds that new financing (McLean, 2011), corporate diversification (Duchin, 2010), bank power
(Sprenkle, 1969; Pinkowitz and Williamson, 2001), corporate governance (Dittmar, Mahrt-Smith, and Servaes,
2003; Harford et al., 2008), and financial constraints (Almeida, Campello, and Weisbach, 2004) are all important
factors associated with corporate liquidity.
27
Maddala and Vogel (1967) argue that panel-data regressions are better than pure cross-sectional regressions for
identifying the determinants of money and the determinants of government security balances.
28
Firm size can also be viewed as a measure of financial constraints (Hadlock and Pierce, 2010). Hadlock and
Pierce argue that firm size and firm age are better measures of financial constraints when compared to the KZ index
(Kaplan and Zingales, 1997).

20
The Determinants of Market Investments

Columns (5) and (6) investigate the determinants of market investments under two

separate models: a Tobit model and an OLS model. The Tobit model is appropriate under the

assumption that investments at zero are censored; managers would like to make negative

investments but are constrained. The OLS model is appropriate under the assumption that a zero

investment is intentional. Both models give similar results.

In column (6), market investment increases with firm size, new financing, the market-to-

book ratio, and R & D expense, but decreases with leverage and cash flow. Firm size is strongly

associated with market investment; a standard-deviation increase in firm size is associated with

an increase of approximately 1.09 in market investments.

For the PII variables, market investment increases with long-term interest expenses,

dividends, and capital expenditure, but decreases with the corporate tax rate. A standard-

deviation increase in dividend payout is associated with an increase of approximately 25.3% in

market investments. A standard-deviation increase in long-term interest expenses is associated

with an increase of approximately 38% in market investments. A standard-deviation increase in

the corporate tax rate is associated with a decrease of approximately 17% in market investments.

Finally, a standard-deviation increase in capital expenditure is associated with an increase of

approximately 12.8% in market investments.

Market Investment as a Percentage of Liquid Assets

To estimate the difference between excess cash and market investment, this paper

compares the coefficients of an excess-cash regression to coefficients of a market-investment

regression. However, in general, firms that invest heavily in marketable securities might also

maintain large cash balances. Moreover, firms might maintain a fixed ratio of market

21
investments to liquid assets. One concern, with respect to the main results, is that there is a

relation between an independent variable and market investment in the cross-section because of

the type of firm that makes market investments. However when observing one firm, there is no

effect on market investment as a percentage of the firm’s liquid assets (cash plus market

investments). Hence Table III, in addition to the basic regressions, presents regression results

where the dependent variable is market investment as a percentage of liquid assets.

Column (4) of Table III investigates the determinants of market investments as a

percentage of liquid assets. In column (4), market investment increases with firm size and R & D

expense, but decreases with leverage and cash flow. For the PII variables, market investment

increases with long-term interest expenses, dividends, and capital expenditure, but decreases

with the corporate tax rate. For the PII variables, the coefficients are statistically significant at

the 1% level.

Are Market Investments and Cash Perfect Substitutes?

In a buffer-stock model, cash and market investment are perfect substitutes and are

therefore statistically equivalent. To test the prediction of the buffer-stock model, Table IV

column (4) uses a generalized Hausman test and compares determinants of market investments to

the determinants of cash by using the base specification with year effects and industry effects.

When comparing coefficients, one goal is to uncover the ways in which market investments are

similar to, or different from cash based on observable variables. If market investments are

equivalent to cash, then the difference in corresponding coefficients should be statistically and

economically indistinguishable from zero (a generalized Hausman test for coefficient equality).

Cash decreases with size, but market investments exhibit the opposite behavior. The

absolute coefficient difference (or elasticity difference) is approximately 1.26 and is statistically

22
significant at the 1% level. These results are partly consistent with a transactions-cost motive for

holding cash, where market investments serve as the money asset account in an inventory model

of cash demand. For cash flow, the coefficient difference is -15.20% and is statistically

significant at the 1% level. Statistically significant coefficient differences are present for 9 of the

remaining 11 variables thus rejecting the hypothesis that the coefficients are statistically

equivalent. For all variables, the cash 65 -weighted average difference in absolute coefficients is

24.2%.

For the PII variables, there are substantial coefficient differences between cash

regressions and market investment regressions. The coefficient differences for long-term interest

expenses, dividend payout, the corporate tax rate, and capital expenditures are all significant at

the 1% level. Compared to the corresponding effect for the cash regression (or the cash effect), a

standard-deviation increase in dividend payout is associated with an increase of approximately

26.4% in market investments. Compared to the cash effect, a standard-deviation increase in long-

term interest expenses is associated with an increase of approximately 13.4% in market

investments. Compared to the cash effect, a standard-deviation increase in the corporate tax rate

is associated with a decrease of approximately 11.8% in market investments. Furthermore,

compared to the cash effect, a standard-deviation increase in capital expenditure is associated

with an increase of approximately 7.9% in market investments. For these PII variables, the cash

65 -weighted average difference in absolute coefficients is 8.1%.

These findings reject the idea that market investment is equivalent to cash. These findings

also reject the idea that cash and market investment differ based on firm size only. Furthermore,

while Table IV presents evidence that market investments are different from cash based on

23
common observable variables, Table III columns (5) and (6) show that cash is not a statistically

significant determinant of market investments through common unobservables.

To examine the storage view, this paper continues by comparing the determinants of

market investments to the determinants of excess cash.

Are Market Investments a Simple Store of Excess Cash?

In a Miller-Orr inventory model, the decision to transfer funds from the cash account to

the investment account is influenced by shocks to cash that engender excess cash. In this model,

market investment is a simple store of excess cash. To test the prediction of the Miller-Orr

model, Table IV column (5) uses a generalized Hausman test and compares determinants of

market investments to the determinants of excess cash by using the base specification with year

effects and industry effects. If market investments are equivalent to excess cash, then the

difference in corresponding coefficients should be statistically and economically

indistinguishable from zero.

Given that excess cash is derived from a regression of cash on the core variables, I focus

on coefficient differences for PII variables only. The coefficient differences for long-term

interest expenses, dividend payout, the corporate tax rate, and capital expenditures are all

significant at the 1% level. Compared to the corresponding effect for the excess-cash regression

(or the excess-cash effect), a standard-deviation increase in dividend payout is associated with an

increase of approximately 25.3% in market investments. Compared to the excess-cash effect, a

standard-deviation increase in long-term interest expenses is associated with an increase of

approximately 20.1% in market investments. Compared to the excess-cash effect, a standard-

deviation increase in the corporate tax rate is associated with a decrease of approximately 13.3%

in market investments. Furthermore, compared to the excess-cash effect, a standard-deviation

24
increase in capital expenditure is associated with an increase of approximately 8.1% in market

investments. For these PII variables, the excess-cash 65 -weighted average difference in absolute

coefficients is approximately 12%. These findings reject the idea that market investment is

equivalent to excess cash for the PII variables.

8. A Natural Experiment: Repatriation Taxes

Table IV presents findings that reject the predictions of the storage view. However, this paper

presents two assumptions for the validity of the test. First, this paper assumes that the PII

variables proposed to test the storage view, taken together, represent general investment and LDI

concerns. The alternative is that the PII variables do not represent the real economic concerns

which I argue to be the drivers that distinguish market investments from excess cash. Second, the

method used to examine the Miller-Orr version of the storage view, given that excess cash is not

directly observable, requires a two-stage estimation process. This paper assumes that the

estimation model is well specified. The alternative is that there is model misspecification. In

particular, there might be misspecification that results in estimation error for excess cash, and

this estimation error might result in coefficient differences that do not reflect real economic

differences.

To validate the two assumptions, which when violated might bias coefficient differences,

Table V uses a natural experiment where there should be no significant coefficient differences

under the two assumptions. The natural experiment focuses on firms with “trapped” liquidity

(firms that would incur taxes on repatriated foreign earnings). These trapped-liquidity firms

accumulate liquid assets (Foley et al., 2007). Moreover, trapped-liquidity firms are limited in

their payout policy (Dharmapala, Foley, and Forbes, 2011) and constrained to capital investment

as general investment because of the requirement to permanently reinvest foreign earnings in

25
capital projects (Blouin, Krull, and Robinson, 2012; Edwards, Kravet, and Wilson, 2012).

Therefore, under the two assumptions, market investment should not be different from excess

cash for trapped-liquidity firms.

Column (4) of Table V shows the market-investment regression results for trapped-

liquidity firms. For these firms, three coefficients are statistically significant at the 5% level or

less: size, the market-to-book ratio, and R & D expenses, where the latter two are associated with

the precautionary motive (Opler et al., 1999). For trapped-liquidity firms, PII variables are not

significantly related to the use of market investments at the 5% level or less.

Column (6) shows coefficient differences for trapped-liquidity firms. Even though there

is some evidence of excess-cash estimation error for trapped-liquidity firms in column (2) where

PII variables are significantly correlated with excess cash, the error does not engender significant

coefficient differences for trapped-liquidity firms in column (6). In column (6), none of the

coefficient differences for PII variables are significant at the 10% level or less. For these PII

variables, the excess-cash 65 -weighted average difference in absolute coefficients is zero.

Moreover, column (6) improves on column (4) in detecting the constraint for trapped-liquidity

firms; two coefficients are significant at the 10% level for PII variables in the market investment

regression, but none of the coefficient differences are statistically significant at the 10% level or

less.

Taken together, these findings suggest that this paper’s empirical method is valid even

when model misspecification might be present. That is, in cases where market investment is not

different from excess cash for economic reasons, there are no statistically significant coefficient

differences for PII variables, and the excess-cash 65 -weighted average difference in absolute

coefficients is zero.

26
9. Investments in Marketable Securities and Acquisitions

Firms that acquire other firms as a growth strategy often make toehold investments before

acquisition completion. Therefore an alternative test for storage versus investment is one that

studies whether differences between market investment and excess cash are related to future

acquisitions. To implement the alternative test, in Table VI I investigate coefficient differences

by toehold status; the toehold dummy variable (in year t) is equal to one if the firm merges or

acquires another firm in year t +1.

The average coefficient difference for acquirers is less than the average coefficient

difference for no-merger firms. However the greater average coefficient difference for no-merger

firms is largely due to coefficient differences for long-term interest expense and dividend payout;

acquirers do not exhibit significant coefficient differences for long-term interest expense and

dividend payout.

While the average coefficient difference for no-merger firms is greater than the average

coefficient difference for acquirers, the absolute coefficient differences for the general

investment variables (corporate tax rate and capital expenditure) are greater for acquirers when

compared to no-merger firms. For no-merger firms, the corporate-tax coefficient difference is

approximately -12%; for acquirers, the corporate-tax coefficient difference is approximately

-19%. For no-merger firms, the capital-expenditure coefficient difference is approximately 7%;

for acquirers, the capital-expenditure coefficient difference is approximately 17%.

For no-merger firms, the excess-cash 65 -weighted average difference in absolute

coefficients is approximately 12%. For acquirers, the excess-cash 65 -weighted average

difference in absolute coefficients is approximately 8%. Hence the results suggest that the

27
difference in the sensitivity to investment (between market investments and excess cash)

increases with future acquisitions.

10.Robustness

This paper finds that the determinants of market investments are different from the determinants

of excess cash. This section explores the robustness of the finding. In particular, are the findings

in Table IV robust when matching on firm size?

Firm Size

Table IV shows that firm size is a particularly important determinant of market

investments. Therefore one concern is that differences between market investment and excess

cash are driven by large firms. To address this concern, Table VII investigates coefficient

differences by firm size.

The average coefficient difference for small firms is less than the average coefficient

difference for large firms. For large and small firms, coefficient differences exist for long-term

interest expenses, the corporate tax rate, capital expenditure, and dividend payout. For large

firms, the excess-cash 65 -weighted average difference in absolute coefficients is approximately

16%. For small firms, the excess-cash 65 -weighted average difference in absolute coefficients is

approximately 14%. Hence the results are robust to heterogeneity based on firm size.

11.The Interaction of Liability-Driven Investment with General Investment

This paper argues that market investments differ from cash and excess cash based on PII

variables and differences could be driven by liability-driven investment (LDI) and concerns for

general investment. However, firms might not all place the same weight on both concerns. For

instance, firms that make market investments for LDI purposes (risk management) could be less

likely to make market investments as general investment through speculation. In addition, it is

28
unclear whether the average coefficient difference is related to LDI and general investment. To

address these concerns, Table VIII investigates coefficient differences by a firm’s propensity for

promised commitments and dividends and by capital expenditure.

To investigate the heterogeneity in coefficient differences based on a firm’s propensity

for promised commitments and dividends, I construct an LDI index equal to the first principal

component of dividend payout and pension expenses. Firm-year observations are split based on

the median cutoff of the LDI index. Table VIII compares coefficient differences for low-LDI

observations and high-LDI observations. Given the sample split, the associated specification

excludes the short-term debt ratio, interest expense, and dividend payout.

The average coefficient difference for low-LDI observations is less than the average

coefficient difference for high-LDI observations. For high-LDI observations, the excess-cash 65 -

weighted average difference in absolute coefficients is approximately 21%. For low-LDI

observations, the excess-cash 65 -weighted average difference in absolute coefficients is

approximately 17%. This finding is consistent with the idea that the difference between excess

cash and market investments increases with LDI concerns.

For both low-LDI observations and high-LDI observations, coefficient differences exist

for the corporate tax rate and capital expenditure. However the correlation between the

corporate-tax coefficient difference and the capital-expenditure coefficient difference is negative;

for the corporate-tax coefficient difference, high-LDI observations are associated with a larger

absolute coefficient difference when compared to low-LDI observations; for the capital-

expenditure coefficient difference, high-LDI observations are associated with a smaller absolute

coefficient difference when compared to low-LDI observations. These findings suggest that

firms that make market investments for LDI purposes are more likely to make market

29
investments for tax arbitrage. The findings also suggest that firms that make market investments

for LDI purposes are less likely to speculate.

To investigate the heterogeneity in coefficient differences based on a firm’s propensity

for general investment through speculation, firm-year observations are split based on the median

cutoff of capital expenditure. Table VIII compares coefficient differences for low-investment

observations and high-investment observations. Given the sample split, the associated

specification excludes capital expenditure.

The average coefficient difference for low-investment observations is less than the

average coefficient difference for high-investment observations. For high-investment

observations, the excess-cash 65 -weighted average difference in absolute coefficients is

approximately 17%. For low-investment observations, the excess-cash 65 -weighted average

difference in absolute coefficients is approximately 13%. This finding is consistent with the idea

that the difference between excess cash and market investments increases with concerns for

general investment through speculation.

For both low-investment observations and high-investment observations, coefficient

differences exist for the corporate tax rate, long-term interest expenses, and dividend payout.

While the long-term interest-expense coefficient difference for low-investment observations is

similar to the corresponding coefficient difference for high-investment observations, the

correlation between the corporate-tax coefficient difference and the dividend-payout coefficient

difference is negative. For the corporate-tax coefficient difference, high-investment observations

are associated with a larger absolute coefficient difference when compared to low-investment

observations; for the dividend-payout coefficient difference, high-investment observations are

associated with a smaller absolute coefficient difference when compared to low-investment

30
observations. These findings suggest that firms that speculate are more likely to make market

investments for tax arbitrage. The findings also suggest that firms that make market investments

as general investment through speculation are less likely to make market investments for LDI

purposes.

Taken together, the results of Table VIII suggest the difference between excess cash and

market investment increases with LDI concerns and concerns for general investment. Moreover,

the findings suggest that the firms that make market investments for LDI (risk management) are

less likely to make market investments as general investment through speculation.

12.Conclusion

Today’s marketable securities are different from the marketable securities of 1960. Market

investment—on average—continues to grow, and previously moderate investment in US

Treasuries has given way to larger29 and more diverse market investment portfolios.

Market investment is not a simple substitute for cash nor is it a store of excess cash. The

average coefficient difference between cash and market investment regressions for all firms (and

all variables) is 24%. Using a natural experiment as a benchmark, this paper shows that for

variables related to payout policy, interest, and investment (PII), market investment does not

differ from excess cash for trapped-liquidity firms that are limited in their payout policy and

constrained to capital investment as general investment. However for all firms, the average

absolute coefficient difference between excess cash and market investment regressions for PII

variables is 12%. Compared to excess cash, market investment has more in common with LDI

and general investment.30

29
Currently, “assets under management” for corporations ($156 million) compare well with average figures for
mutual funds ($300 million) and hedge funds ($80 million).
30
Moreover, the results presented in this paper show that the capital-expenditure coefficient difference increases
with future acquisitions.

31
 Market investment could in some ways be a compromise choice that occupies a space in

between capital investment and cash. Like cash, market investments provide the firm with

flexibility31 (Denis, 2011). Like capital investment, market investment is not perfectly

transparent; it is associated with a decision where the financial manager has more information

about the investment than the firm’s shareholder does about the investment.

Rather than study market investments in a liquidity-demand model, researchers might

find it more useful to study market investments in a model of investment decision-making

(Keynes, 1936; Tobin, 1955; Scott, 1979; Stein, 2003). It could even be the case that for market

investments, investment decision-making by corporations is just as important a research topic as

investment decision-making by households and financial intermediaries.

To understand the specialness of market investments, researchers might find it useful to

study market investments in a model of liability-driven investment.32 As a tool used to maintain

stable funds for financial commitments and dividends, market investments could be superior to

cash. This paper’s findings support the use of market investment (relative to excess cash) to

manage future long-term financial commitments and payout policy. Compared to excess cash,

market investment is strongly correlated with future financial commitments and dividends.33

The evidence presented in this paper has implications for financial managers and

regulators. With regard to financial managers, researchers might want to explore the idea of

optimal market investment. The issue of managerial market-timing could also be important for

31
Gamba and Triantis (2008) argue that flexibility provides a reason for maintaining debt and liquidity. The
evidence suggests that liquidity might serve a purpose other than financial flexibility. This paper finds that,
compared to cash and excess cash, market investment might be used for speculation and LDI.
32
Bolton, Chen, and Wang (2011a, 2011b) provide a useful framework for understanding a variety of corporate
policies in relation to risk management in addition to speculative investment and financial flexibility.
33
Moreover, this paper’s findings suggest market investment could be one mechanism through which firms—in
aggregate—can increase dividends without increasing repurchases (the dividend puzzle). If so, then market
investment can provide an explanation for the dividend puzzle (Jagannathan, Stephens, and Weisbach, 2000). This
idea and the motivating findings from this paper deserve further study.

32
market investments.34 Regulators might want to take an economic approach to the classification

of investment companies and the regulation of market investments.

In general, efforts to determine the composition of a firm’s market investments from

publicly available information bear little fruit. Greater transparency could improve upon

financial market efficiency and financial system health. Currently, if a firm holds more than 40%

of its total assets in market investments (excluding US Treasuries and cash equivalents), it can

attract the attention of the Securities and Exchange Commission (SEC), and might have to

register as an investment company.35 Instead of focusing on an arbitrary asset-based cutoff—

which might no longer be relevant—regulators might want to consider focusing on a general

benefit-cost analysis of market investments.

Although not directly investigated in this paper, the incentives to avoid regulatory

scrutiny could result in increased market investment risk. If firms are motivated to maintain a

low level of perceived market investment risk,36 they might tend to rely more on credit ratings

when compared to financial intermediaries with a higher investment risk tolerance. The global

financial crisis provides a painful lesson that highly rated securities can in fact be very risky

(Coval, Jurek, and Stafford, 2009). Investors, formerly lured by the promise of high yields and

low risk, now have to explain why seemingly prudent investment decision-making was met with

huge losses in 2008. Financial intermediaries have been particularly susceptible to this problem,

but a nonfinancial corporation could also be susceptible given its focus on credit ratings. This

and other issues surrounding marketable securities are worth exploring in future research.

34
See Faulkender (2005) for an example of managerial discretion with respect to the liability timing.
35
See the Appendix for a case study of National Presto Industries.
36
To avoid being regulated as an investment company (Investment Company Act of 1940), nonfinancial
corporations face limits on risky marketable security investment.

33
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38
 Table I. Aggregate Cash and Corporate Market Investments by Asset Class:
Period Means
The table provides time-series means of aggregate balance sheet items (cash, financial assets,
and tangible assets) for nonfarm nonfinancial corporations in the US economy. The full period is
1945 to 2005 (Federal Reserve Board of Governors) and is divided into three sub-periods: Period
1 (1945 to 1964), Period 2 (1965 to 1984), and Period 3 (1985 to 2005). All nominal balance
sheet items are converted to 2005 dollars using the Consumer Price Index. Foreign deposits are
deposits, including negotiable certificates of deposit, held in foreign financial institutions.
Checkable deposits consist of demand deposits, negotiable order of withdrawal (NOW) accounts
and automatic transfer service (ATS) accounts. Currency is US currency and coin. Time and
savings deposits are deposits that depositors may withdraw after giving prior notice. Money
market mutual funds are open-end investment companies that invest in short-term, liquid assets,
including short-term municipal securities. A security repurchase agreement is an agreement to
sell an asset, in many cases a federal government security, accompanied simultaneously by an
agreement that the seller will repurchase the asset at a later date at a higher price. Commercial
paper consists of short-term unsecured promissory notes issued by financial and nonfinancial
borrowers. US Treasury securities are marketable and securities issued by the Department of the
Treasury. US Govt. agency securities are issued by various federal agencies, other than the
Treasury. Municipal securities and loans are obligations issued primarily by state and local
governments. Mortgages are loans that are secured in whole or in part by real property. Mutual
fund shares are obligations issued by mutual funds; the category excludes money market mutual
fund shares. Equity in government-sponsored enterprises (GSE) is equity ownership in Fannie
Mae, the Farm Credit System, and the Federal Home Loan Banks. Unidentified miscellaneous
claims are obtained directly as the total amount reported by original sources as ‘‘other’’ financial
assets. Consumer credit consists of short-term and intermediate-term loans to individuals. Trade
credits are accounts receivable arising from the sale of business-related goods and services.
Foreign direct investment is the acquisition of equity in, and the provision of loans to, US
affiliates of foreign firms by the purchase of tangible or financial assets of US firms or the direct
ownership of their equity shares; the 10 percent threshold that distinguishes direct investment
from portfolio investment. Insurance receivables are deferred and unpaid life insurance
premiums. Investment in finance company (FC) subsidiaries is the acquisition of equity
ownership in the subsidiary companies. Among these subsidiaries companies are the subsidiaries
of motor vehicle manufacturers and the credit subsidiaries of major retailers.

39
 Period 1: 1945 - 1964 Period 2: 1965 - 1984 Period 3: 1985 - 2005
Time-Series Means Time-Series Means Time-Series Means
Amount % of % of Amount % of % of Amount % of % of
(in $BN, (in $BN, (in $BN,
2005) TANA MINV 2005) TANA MINV 2005) TANA MINV
Cash and cash equivalents 215.439 11.388 150.347 313.734 7.351 101.794 622.362 9.044 17.555
Foreign deposits 1.463 0.062 0.996 15.034 0.335 3.365 30.481 0.454 0.934
Checkable deposits and currency 199.971 10.681 139.678 198.228 4.744 73.831 238.026 3.646 7.796
Time and savings deposits 13.908 0.642 9.612 83.067 1.887 20.577 211.936 3.028 5.684
Money market funds 0.000 0.000 0.000 7.863 0.163 0.755 136.151 1.830 2.961
Security repurchase agreement 0.097 0.003 0.061 9.542 0.223 3.267 5.769 0.086 0.180
Market investments (MINV) 145.712 7.804 100.000 563.529 12.324 100.000 3689.712 53.040 100.000
Commercial paper 3.138 0.136 2.174 33.279 0.789 12.498 44.203 0.622 1.129
US Treasury securities 122.241 6.790 83.972 45.351 1.093 16.207 51.072 0.811 1.849
US Govt. agency securities 3.152 0.125 2.143 7.935 0.187 2.571 15.165 0.225 0.450
Municipal securities and loans 9.941 0.452 6.822 20.377 0.480 6.734 42.946 0.668 1.463
Mortgages 0.270 0.013 0.190 30.887 0.653 3.579 75.553 1.179 2.618
Mutual funds 0.199 0.007 0.132 4.154 0.095 1.258 73.707 1.021 1.774
Equity in GSE 0.183 0.007 0.125 0.210 0.006 0.156 0.000 0.000 0.000
Unidentified misc. investments 6.587 0.274 4.440 421.335 9.021 56.997 3387.067 48.514 90.717
Other identified financial assets 628.988 30.657 435.359 1823.302 42.312 563.670 3167.489 46.776 93.551
Consumer credit 57.595 2.902 39.944 77.486 1.857 28.662 89.702 1.383 2.981
Trade credit 406.469 19.887 281.456 1061.831 24.772 342.180 1637.159 24.434 49.815
Foreign direct investment 145.623 6.975 100.587 599.828 13.771 170.714 1193.288 17.257 33.156
Insurance receivables 193.019 0.893 13.373 75.988 1.739 21.204 218.306 3.273 6.724
Investment in FC subsidiaries 0.000 0.000 0.000 8.169 0.172 0.910 29.034 0.429 0.875
Tangible assets (TANA) 1996.542 100.000 1386.685 4271.995 100.000 1394.026 6687.987 100.000 204.772
Total assets 2986.682 149.850 2072.392 6972.560 161.986 2159.489 14200.000 208.860 415.878
 Figure I. Real Amount of Market Investments by Asset Class
The figure presents the amounts of aggregate market investments for nonfarm nonfinancial
corporations in the US economy (Federal Reserve Board of Governors). All nominal items are
converted to 2005 dollars using the Consumer Price Index. Commercial paper consists of short-
term unsecured promissory notes issued by financial and nonfinancial borrowers. US Treasury
securities are marketable and securities issued by the Department of the Treasury. US Govt.
agency securities are issued by various federal agencies, other than the Treasury. Municipal
securities and loans (Munis) are obligations issued primarily by state and local governments.
Mortgages are loans that are secured in whole or in part by real property. Mutual fund shares are
obligations issued by mutual funds; the category excludes money market mutual fund shares.
Equity in government-sponsored enterprises (GSE) is equity ownership in Fannie Mae, the Farm
Credit System, and the Federal Home Loan Banks.

Market Investments by Asset Class

Amount in Billions of 2005 US Dollars
0 50 100 150 200

1945 1955 1965 1975 1985 1995 2005

Year

US Treasury Commercial Paper

Munis Govt Agency
Mortgages Mutual Funds & GSE Equity
 Figure II. Market Investment Portfolio Composition
The figure presents the classes of aggregate market investments for nonfarm nonfinancial
corporations in the US economy as a percentage of total aggregate market investments (Federal
Reserve Board of Governors). All nominal items are converted to 2005 dollars using the
Consumer Price Index. Commercial paper consists of short-term unsecured promissory notes
issued by financial and nonfinancial borrowers. US Treasury securities are marketable and
securities issued by the Department of the Treasury. US Govt. agency securities are issued by
various federal agencies, other than the Treasury. Municipal securities and loans (Munis) are
obligations issued primarily by state and local governments. Mortgages are loans that are secured
in whole or in part by real property. Mutual fund shares are obligations issued by mutual funds;
the category excludes money market mutual fund shares. Equity in government-sponsored
enterprises (GSE) is equity ownership in Fannie Mae, the Farm Credit System, and the Federal
Home Loan Banks. Unidentified miscellaneous claims (other investments) are obtained directly
as the total amount reported by original sources as ‘‘other’’ financial assets.

Market Investments by Asset Class

80 100
% of Total Market Investments
0 20 40 60

1945 1955 1965 1975 1985 1995 2005

Year

US Treasury Other Investments

Commercial Paper Munis
Govt Agency Mortgages
Mutual Funds & GSE Equity

42
 Exhibit I. An Example: Google
The exhibit presents Note 3 from the 10-K filing for Google Inc for the annual period ended
December 31, 2011. It presents amounts for the firm’s various liquid assets. These amounts are
from the December 2010 and December 2011 fiscal years (in millions of US dollars). Cash
consists of demand deposits, physical currency and coin. US government agencies are securities
issued by various federal agencies, other than the Treasury. Time deposits are deposits that
depositors may withdraw after giving prior notice. Money market mutual funds are open-end
investment companies that invest in short-term, liquid assets, including short-term municipal
securities. US government notes are marketable securities issued by the Department of the
Treasury. Foreign government bonds are obligations issued by foreign governments. Municipal
securities are obligations issued primarily by state and local governments. Corporate debt
securities are obligations issued by corporations. Agency residential mortgage-backed securities
are claims on cash flows from residential mortgages. Marketable equity securities consist of
equity or stock investments.

As of December 31,
2010 2011
Cash and cash equivalents:
Cash $ 4,652 $ 4,712
Cash equivalents:
Time deposits 973 534
Money market and other funds 7,547 4,462
U.S. government agencies 0 275
U.S. government notes 300 0
Foreign government bonds 150 0
Corporate debt securities 8 0

Total cash and cash equivalents 13,630 9,983

Marketable securities:
Time deposits 307 495
U.S. government agencies 1,857 6,226
U.S. government notes 3,930 11,579
Foreign government bonds 1,172 1,629
Municipal securities 2,503 1,794
Corporate debt securities 5,742 6,112
Agency residential mortgage-backed securities 5,673 6,501
Marketable equity securities 161 307

Total marketable securities 21,345 34,643

Total cash, cash equivalents, and marketable securities $ 34,975 $ 44,626

43
Table II. Corporate Market Investments: Definitions and Summary Statistics
The table provides summary statistics for observations in the sample. The sample period is 1971
to 2006. All nominal balance sheet items are converted to 2006 dollars using the Consumer Price
Index. Market investments is short-term investments plus noncurrent investments using the
equity and market methods. Cash is cash holdings. Liquid assets is the sum of Cash and Market
investments. Capital expenditure is capital investments. Cash flow is EBITDA minus interest
minus taxes minus common dividends. New financing is equal to total equity issuance minus
repurchases plus debt issuance minus debt redemption. Repurchases is the net repurchase of
common shares and preferred stock. Interest expense is the interest expense of the firm. Short-
term debt ratio is current liabilities divided by the sum of current liabilities and long-term debt.
Dividend payout is equal to common dividend paid. Market-to-book ratio is total assets minus
cash minus current market investments minus noncurrent investments using the equity and
market methods minus book value of equity plus the market value of equity, all normalized.
Repatriation tax is the tax costs of repatriating earnings (Foley et al., 2007). Pension expense is
the pension expense of the firm. In Table A.II, all aforementioned variables are normalized by
total assets minus the book value of equity plus the market value of equity minus cash minus
current market investments minus noncurrent investments using the equity and market methods.
In other tables, all aforementioned variables are normalized by total assets minus cash minus
current market investments minus noncurrent investments using the equity and market methods.
Size is the market value of equity. Leverage is market leverage. R & D expense is the research
and development expenditures of the firm divided by sales. Marginal tax rate is the trichotomous
variable for corporate tax rate (Graham, 1996). Toehold is equal to one if the firm acquires or
merges with another firm in year t+1, and zero otherwise. Multiple segment is equal to one if the
firm has more than one segment, and zero otherwise. LDI Index is the first principal component
factor of Dividend payout and Pension expense.

Variable Name Mean sd. N Q50

Market investments 0.213 0.797 108864 0.016
Cash 0.192 0.582 108864 0.043
Capital expenditure 0.096 0.104 108864 0.062
Size 839.341 2851.850 108864 82.288
Cash flow -0.062 0.594 108864 0.068
Leverage 0.295 0.248 108864 0.237
New financing 0.190 0.792 108864 0.008
Market-to-book ratio 2.485 4.466 108864 1.317
R & D expense 0.120 0.607 108864 0.000
Marginal tax rate 33.522 11.308 108864 35.000
Repurchases -0.018 0.133 108864 0.000
Short-term debt ratio 0.320 0.319 108864 0.197
Interest expense 0.033 0.038 108864 0.024
Dividend payout 0.009 0.020 108864 0.000

44
 Table III. Cash and Corporate Market Investments
The table presents regression results for the sample where the dependent variables are the
logarithm of Cash in columns (1) and (2), the excess logarithm of Cash in column (3), the ratio
of Market investments to Liquid assets in column (4), and the logarithm of Market investments in
columns (5) and (6). Variable definitions are presented in Table II.
Fama- Market Tobit
Macbeth Excess Investments/ Log(Market Log(Market
Log(Cash) Log(Cash) Log(Cash) L. Assets Investments) Investments)
Log (Size) -0.177 -0.208 -0.012 0.084 1.735 1.086
(12.306)** (16.736)** (1.763)+ (25.861)** (26.103)** (25.245)**
Cash flow 0.005 -0.014 -0.027 -0.017 -0.238 -0.138
(0.229) (0.272) (2.211)* (5.412)** (3.063)** (2.558)*
Leverage -0.547 -0.535 -0.024 0.003 -0.351 -0.256
(41.630)** (11.916)** (3.990)** (0.962) (5.723)** (6.835)**
New financing 0.354 0.302 0.006 -0.005 0.248 0.205
(29.560)** (13.660)** (0.903) (2.578)** (4.899)** (5.598)**
Market-to-book ratio 0.249 0.290 -0.040 -0.001 0.133 0.153
(17.263)** (16.907)** (5.312)** (0.393) (2.050)* (3.272)**
R & D expense 0.110 -0.105 0.144 0.014 0.397 0.298
(8.633)** (1.655) (17.913)** (5.767)** (7.190)** (7.500)**
Cash 0.094 0.071
(1.350) (1.428)
Payout, Interest and
Investment (PII)
Repurchases -0.016 -0.007 0.001 0.036 0.027
(1.639) (1.303) (0.446) (0.781) (0.955)
Short-term debt ratio 0.030 0.040 0.003 0.131 0.100
(2.481)* (6.992)** (1.185) (2.324)* (2.855)**
Short-term debt
ratio* -0.203 -0.118 0.002 -0.246 -0.166
Interest expense (12.835)** (13.508)** (0.809) (3.725)** (3.915)**
Interest expense 0.249 0.182 0.020 0.508 0.380
(15.502)** (18.328)** (6.544)** (7.578)** (8.362)**
Marginal tax rate -0.052 -0.037 -0.008 -0.262 -0.170
(4.670)** (7.159)** (3.369)** (4.924)** (5.134)**
Capital expenditure 0.049 0.047 0.007 0.176 0.128
(4.780)** (10.239)** (3.737)** (4.021)** (4.483)**
Dividend payout -0.011 0.000 0.025 0.332 0.253
(0.701) (0.021) (8.733)** (5.930)** (6.543)**
Number of obs. 108864 124718 108864 108307 108864 108864
Model p-value 0.000 0.000 0.000 0.000 0.000 0.000
The sample period is 1971 to 2006. The coefficients are estimated using OLS in columns (1), (3), (4) and (6); Fama-Macbeth in column (2); a
Tobit model in column (5). All regressions other than column (2) use year and industry effects. Heteroscedasticity-robust standards errors are
estimated and corrected for clustering at the firm level. Absolute t-statistics are reported in parentheses. The Model p-value shows the result for a
test that all of the listed coefficients are jointly zero. +, *, ** denote statistical significance at the 10%, 5% and 1% levels.

45
 Table IV. Comparing Cash to Corporate Market Investments
The table presents regression results for the sample where the dependent variables are the
logarithm of Cash in column (1) the excess logarithm of Cash in column (2) and the logarithm of
Market investments in column (3). Variable definitions are presented in Table II.
(1) (2) (3) (3) - (1) (3) - (2)
Excess Log(Market Cash E. Cash
Log(Cash) Log(Cash) Investments) Comparison Comparison
Log (Size) -0.177 -0.012 1.085 1.262 1.097
(12.306)** (1.763)+ (25.206)** [0.000]** [0.000]**
Cash flow 0.005 -0.027 -0.147 -0.152 -0.120
(0.229) (2.211)* (2.724)** [0.004]** [0.019]*
Leverage -0.547 -0.024 -0.260 0.287 -0.236
(41.630)** (3.990)** (6.974)** [0.000]** [0.000]**
New financing 0.354 0.006 0.234 -0.120 0.228
(29.560)** (0.903) (7.238)** [0.000]** [0.000]**
Market-to-book ratio 0.249 -0.040 0.163 -0.086 0.203
(17.263)** (5.312)** (3.538)** [0.068]+ [0.000]**
R & D expense 0.110 0.144 0.300 0.190 0.156
(8.633)** (17.913)** (7.542)** [0.000]** [0.000]**
Payout, Interest and
Investment (PII)
Repurchases -0.016 -0.007 0.029 0.045 0.036
(1.639) (1.303) (1.004) [0.108] [0.194]
Short-term debt ratio 0.030 0.040 0.101 0.071 0.061
(2.481)* (6.992)** (2.895)** [0.041]* [0.071]+
Short-term debt ratio* -0.203 -0.118 -0.168 0.035 -0.050
Interest expense (12.835)** (13.508)** (3.963)** [0.420] [0.222]
Interest expense 0.249 0.182 0.383 0.134 0.201
(15.502)** (18.328)** (8.407)** [0.003]** [0.000]**
Marginal tax rate -0.052 -0.037 -0.170 -0.118 -0.133
(4.670)** (7.159)** (5.121)** [0.000]** [0.000]**
Capital expenditure 0.049 0.047 0.128 0.079 0.081
(4.780)** (10.239)** (4.473)** [0.006]** [0.004]**
Dividend payout -0.011 0.000 0.253 0.264 0.253
(0.701) (0.021) (6.548)** [0.000]** [0.000]**
Avg. diff: cash eta-sq 0.242 0.118
Number of obs. 108864 108864 108864
Adj. R-squared 0.214 0.104 0.135
The sample period is 1971 to 2006. Column (4) presents the difference in coefficients between columns (3) and (1); column (5) presents the
difference in coefficients between columns (3) and (2). All regressions use year and industry effects. Heteroscedasticity-robust standards errors
are estimated and corrected for clustering at the firm level. Absolute t-statistics are reported in parentheses in columns (1), (2) and (3). The p-
values for a generalized Hausman test are reported in brackets in columns (4) and (5); the null hypothesis is that the difference in the coefficients
is zero. The average difference in significant (10% or less) coefficients for all variables (column 5) or the PII variables (column 6) is calculated
using eta-squared weights for the respective cash regressions. The Model p-value shows the result for a test that all of the listed coefficients are
jointly zero. +, *, ** denote statistical significance at the 10%, 5% and 1% levels.

46
 Table V. A Natural Experiment: Repatriation
The table presents regression results by Repatriation tax (median cut) for the sample where the
dependent variables are the excess logarithm of Cash in columns (1) and (2) and the logarithm of
Market investments in columns (3) and (4). Variable definitions are presented in Table II.
(1) (2) (3) (4) (3) - (1) (4) - (2)
No Tax Tax No Tax Tax
Excess Excess Log(Market Log(Market No Tax Tax
Log(Cash) Log(Cash) Investments) Investments) Comparison Comparison
Log (Size) -0.019 0.014 1.045 1.439 1.064 1.425
(2.601)** (0.714) (23.212)** (11.627)** [0.000]** [0.000]**
Cash flow -0.037 0.209 -0.146 -0.151 -0.109 -0.360
(2.907)** (1.862)+ (2.584)** (0.369) [0.042]* [0.313]
Leverage -0.022 -0.110 -0.278 -0.053 -0.256 0.057
(3.401)** (4.162)** (7.053)** (0.364) [0.000]** [0.682]
New financing 0.005 -0.020 0.245 0.122 0.240 0.142
(0.681) (0.290) (7.301)** (0.462) [0.000]** [0.557]
Market-to-book ratio -0.050 0.159 0.128 0.976 0.178 0.817
(6.313)** (4.102)** (2.687)** (4.891)** [0.002]** [0.000]**
R & D expense 0.136 0.383 0.283 0.922 0.147 0.539
(16.657)** (3.572)** (7.024)** (2.522)* [0.002]** [0.090]+
Payout, Interest and
Investment (PII)
Repurchases -0.006 -0.018 0.036 -0.084 0.042 -0.066
(1.023) (0.690) (1.205) (0.694) [0.149] [0.562]
Short-term debt ratio 0.035 0.058 0.079 0.224 0.044 0.166
(5.716)** (3.245)** (2.137)* (1.935)+ [0.221] [0.147]
Short-term debt ratio* -0.113 -0.089 -0.160 -0.069 -0.047 0.020
Interest expense (12.046)** (2.223)* (3.592)** (0.361) [0.274] [0.912]
Interest expense 0.176 0.262 0.358 0.318 0.182 0.056
(16.585)** (5.766)** (7.380)** (1.724)+ [0.001]** [0.741]
Marginal tax rate -0.039 -0.073 -0.167 -0.154 -0.128 -0.081
(6.941)** (3.963)** (4.707)** (1.339) [0.000]** [0.472]
Capital expenditure 0.049 0.070 0.145 0.131 0.096 0.061
(10.004)** (3.046)** (4.835)** (0.930) [0.001]** [0.662]
Dividend payout 0.003 -0.011 0.273 0.148 0.270 0.159
(0.343) (0.451) (6.447)** (1.257) [0.000]** [0.169]
Avg. diff: cash eta-sq 0.109 0.000
Number of obs. 89147 7239 89147 7239
Adj. R-squared 0.109 0.146 0.135 0.143
The sample period is 1971 to 2006. Column (5) presents the difference in coefficients between columns (3) and (1); column (6) presents the
difference in coefficients between columns (4) and (2). All regressions use year and industry effects. Heteroscedasticity-robust standards errors
are estimated and corrected for clustering at the firm level. Absolute t-statistics are reported in parentheses in columns (1), (2), (3) and (4). The p-
values for a generalized Hausman test are reported in brackets in columns (5) and (6); the null hypothesis is that the difference in the coefficients
is zero. The average difference in significant (10% or less) coefficients for the PII variables is calculated using eta-squared weights for the
respective cash regressions. The adjusted R-squared measures the fit. +, *, ** denote statistical significance at the 10%, 5% and 1% levels.

47
 Table VI. Corporate Market Investments and Acquisitions
The table presents regression results by Toehold status for the sample where the dependent
variables are the excess logarithm of Cash in columns (1) and (2) and the logarithm of Market
investments in columns (3) and (4). Variable definitions are presented in Table II.
(1) (2) (3) (4) (3) - (1) (4) - (2)
No Merger Acquirers No Merger Acquirers
Excess Excess Log(Market Log(Market No Merger Acquirers
Log(Cash) Log(Cash) Investments) Investments) Comparison Comparison
Log (Size) -0.009 -0.034 0.991 1.336 1.000 1.370
(1.272) (2.804)** (22.077)** (19.320)** [0.000]** [0.000]**
Cash flow -0.049 0.048 -0.158 -0.352 -0.109 -0.400
(3.868)** (1.736)+ (2.804)** (2.761)** [0.041]* [0.001]**
Leverage -0.010 -0.124 -0.300 -0.073 -0.290 0.051
(1.614) (8.328)** (7.771)** (0.949) [0.000]** [0.496]
New financing -0.003 0.041 0.202 0.288 0.205 0.247
(0.448) (2.331)* (5.650)** (3.857)** [0.000]** [0.000]**
Market-to-book ratio -0.055 -0.003 0.116 0.340 0.171 0.343
(6.771)** (0.217) (2.285)* (4.278)** [0.001]** [0.000]**
R & D expense 0.141 0.171 0.292 0.450 0.151 0.279
(17.053)** (8.933)** (6.993)** (5.439)** [0.000]** [0.000]**
Payout, Interest and
Investment (PII)
Repurchases -0.007 -0.016 0.019 0.081 0.026 0.097
(1.265) (1.327) (0.637) (1.426) [0.371] [0.073]+
Short-term debt ratio 0.028 0.086 0.032 0.367 0.004 0.281
(4.737)** (7.489)** (0.863) (5.583)** [0.920] [0.000]**
Short-term debt ratio* -0.104 -0.219 -0.136 -0.277 -0.032 -0.058
Interest expense (11.711)** (8.739)** (3.084)** (2.586)** [0.451] [0.567]
Interest expense 0.166 0.282 0.378 0.346 0.212 0.064
(16.034)** (12.110)** (7.816)** (3.932)** [0.000]** [0.457]
Marginal tax rate -0.036 -0.041 -0.158 -0.235 -0.122 -0.194
(6.774)** (3.814)** (4.576)** (3.665)** [0.000]** [0.002]**
Capital expenditure 0.043 0.074 0.113 0.243 0.070 0.169
(9.102)** (6.655)** (3.853)** (3.712)** [0.016]* [0.007]**
Dividend payout 0.004 -0.010 0.293 0.096 0.289 0.106
(0.495) (0.870) (7.195)** (1.561) [0.000]** [0.084]+
Avg. diff: cash eta-sq 0.121 0.077
Number of obs. 88624 20240 88624 20240
Adj. R-squared 0.109 0.117 0.133 0.162
The sample period is 1971 to 2006. Column (5) presents the difference in coefficients between columns (3) and (1); column (6) presents the
difference in coefficients between columns (4) and (2). All regressions use year and industry effects. Heteroscedasticity-robust standards errors
are estimated and corrected for clustering at the firm level. Absolute t-statistics are reported in parentheses in columns (1), (2), (3) and (4). The p-
values for a generalized Hausman test are reported in brackets in columns (5) and (6); the null hypothesis is that the difference in the coefficients
is zero. The average difference in significant (10% or less) coefficients for the PII variables is calculated using eta-squared weights for the
respective cash regressions. The adjusted R-squared measures the fit. +, *, ** denote statistical significance at the 10%, 5% and 1% levels.

48
 Table VII. The Role of Firm Size
The table presents regression results by Size (median cut) for the sample where the dependent
variables are the excess logarithm of Cash in columns (1) and (2) and the logarithm of Market
investments in columns (3) and (4). Variable definitions are presented in Table II.
(1) (2) (3) (4) (3) - (1) (4) - (2)
Small Large Small Large
Excess Excess Log(Market Log(Market Small Large
Log(Cash) Log(Cash) Investments) Investments) Comparison Comparison
Log (Size) 0.033 -0.073 0.589 1.397 0.556 1.470
(2.507)* (6.074)** (6.956)** (18.463)** [0.000]** [0.004]**
Cash flow -0.137 0.115 -0.341 -0.125 -0.204 -0.240
(9.249)** (5.587)** (5.359)** (1.412) [0.001]** [0.005]**
Leverage -0.015 -0.048 -0.429 -0.221 -0.414 -0.173
(2.234)* (4.196)** (9.629)** (3.476)** [0.000]** [0.000]**
New financing -0.002 0.004 0.143 0.265 0.145 0.261
(0.169) (0.404) (3.064)** (6.168)** [0.002]** [0.000]**
Market-to-book ratio -0.146 0.003 -0.287 0.298 -0.141 0.295
(12.044)** (0.275) (3.716)** (5.657)** [0.066]+ [0.000]**
R & D expense 0.117 0.186 0.145 0.509 0.028 0.323
(12.523)** (16.217)** (2.951)** (10.584)** [0.561] [0.000]**
Payout, Interest and
Investment (PII)
Repurchases -0.017 -0.011 0.038 -0.054 0.055 -0.043
(2.886)** (1.073) (1.206) (1.122) [0.076]+ [0.346]
Short-term debt ratio 0.012 0.065 -0.049 0.205 -0.061 0.140
(1.661)+ (7.730)** (1.103) (4.008)** [0.161] [0.005]**
Short-term debt ratio* -0.094 -0.082 -0.128 -0.123 -0.034 -0.041
Interest expense (9.919)** (3.576)** (2.638)** (1.436) [0.483] [0.613]
Interest expense 0.146 0.225 0.389 0.423 0.243 0.198
(12.597)** (14.186)** (7.132)** (5.730)** [0.000]** [0.004]**
Marginal tax rate -0.023 -0.060 -0.121 -0.238 -0.098 -0.178
(3.854)** (6.922)** (3.044)** (4.603)** [0.013]* [0.000]**
Capital expenditure 0.035 0.057 0.113 0.151 0.078 0.094
(6.799)** (7.210)** (3.432)** (3.247)** [0.017]* [0.036]*
Dividend payout 0.034 -0.005 0.394 0.181 0.360 0.186
(2.899)** (0.635) (6.445)** (3.910)** [0.000]** [0.000]**
Avg. diff: cash eta-sq 0.140 0.164
Number of obs. 57731 51133 57731 51133
Adj. R-squared 0.129 0.129 0.139 0.139
The sample period is 1971 to 2006. Column (5) presents the difference in coefficients between columns (3) and (1); column (6) presents the
difference in coefficients between columns (4) and (2). All regressions use year and industry effects. Heteroscedasticity-robust standards errors
are estimated and corrected for clustering at the firm level. Absolute t-statistics are reported in parentheses in columns (1), (2), (3) and (4). The p-
values for a generalized Hausman test are reported in brackets in columns (5) and (6); the null hypothesis is that the difference in the coefficients
is zero. The average difference in significant (10% or less) coefficients for the PII variables is calculated using eta-squared weights for the
respective cash regressions. The adjusted R-squared measures the fit. +, *, ** denote statistical significance at the 10%, 5% and 1% levels.

49
 Table VIII. Corporate Market Investments: LDI and General Investment
The table presents coefficient differences by LDI index (median cut) and Capital expenditure
(median cut) for the sample where the dependent variables are the excess logarithm of Cash in
and the logarithm of Market investments. Variable definitions are presented in Table II.

Low High
Low LDI High LDI Investment Investment
Comparison Comparison Comparison Comparison
Log (Size) 0.954 1.161 1.038 1.127
[0.000]** [0.000]** [0.000]** [0.000]**
Cash flow -0.173 -0.091 -0.302 0.017
[0.017]* [0.338] [0.001]** [0.784]
Leverage -0.365 -0.630 -0.314 -0.154
[0.000]** [0.000]** [0.000]** [0.001]**
New financing 0.159 0.129 0.130 0.265
[0.001]** [0.045]* [0.050]* [0.000]**
Market-to-book ratio 0.399 0.339 0.003 0.263
[0.000]** [0.000]** [0.962] [0.000]**
R & D expense 0.106 0.238 0.088 0.188
[0.052]+ [0.003]** [0.148] [0.000]**
Payout, Interest and Investment (PII)
Repurchases 0.122 0.031 0.040 0.021
[0.002]** [0.588] [0.262] [0.552]
Short-term debt ratio -0.020 0.151
[0.663] [0.001]**
Short-term debt ratio* -0.002 -0.102
Interest expense [0.978] [0.075]+
Interest expense 0.204 0.198
[0.000]** [0.000]**
Marginal tax rate -0.102 -0.246 -0.102 -0.182
[0.030]* [0.001]** [0.011]* [0.000]**
Capital expenditure 0.183 0.156
[0.000]** [0.012]*
Dividend payout 0.277 0.235
[0.000]** [0.000]**
Avg. diff: cash eta-sq 0.166 0.205 0.128 0.166
Number of obs. 41624 42030 54755 54109
The sample period is 1971 to 2006. All regressions use year and industry effects. Heteroscedasticity-robust standards errors are estimated and
corrected for clustering at the firm level. The p-values for a generalized Hausman test are reported in brackets; the null hypothesis is that the
difference in the coefficients is zero. The average difference in significant (10% or less) coefficients for the PII variables is calculated using eta-
squared weights for the respective cash regressions. +, *, ** denote statistical significance at the 10%, 5% and 1% levels.

50
Appendix

13. Aggregate Market Investments and Aggregate Cash

Taking data from the Flow of Funds Accounts, Figure A.I shows that aggregate cash (as a

percentage of tangible assets) decreases with time for the years 1945 to 1974, then increases with

time for the years 1975 to 2008. In contrast to the evidence for cash, the evidence presented in

Figure A.II shows that aggregate market investment (as a percentage of tangible assets) is

roughly constant for the years 1945 to 1974, and then increases substantially from 1975 to 2008.

14. Further Robustness

This paper finds that the determinants of market investments are different from the determinants

of excess cash. This section explores the robustness of the finding. In particular, are the findings

in Table IV robust when matching on firm multiple-segment status? Are the results robust when

using an alternative normalization variable?

Multiple Business Segments

Firms with multiple segments often use internal capital markets as a matter of business

strategy. Moreover, some multiple-segment firms maintain finance-company segments to

facilitate consumer purchases. Therefore, one concern is that differences between market

investment and excess cash are driven by multiple-segment firms. To address this concern, Table

A.I investigates coefficient differences by multiple-segment status.

The average coefficient difference for single-segment firms is substantially less than the

average coefficient difference for multiple-segment firms. For multiple-segment firms,

coefficient differences exist for long-term interest expenses, the corporate tax rate, capital

expenditure, and dividend payout. However for single-segment firms, coefficient differences

exist for long-term interest expenses, capital expenditure, and dividend payout. For multiple-

51
segment firms, the excess-cash 65 -weighted average difference in absolute coefficients is

approximately 24%. For single-segment firms, the excess-cash 65 -weighted average difference

in absolute coefficients is approximately 14%. Hence the results are robust to heterogeneity

based on multiple business segments.

An Alternative Normalization Variable

For this paper’s main tests, the market investment variable is normalized by lagged net

assets (at book value). However market investments can be recorded at market value. This

difference in accounting might introduce an upward bias in the market investment variable

simply because of a firm’s accounting practices. As a robustness check, Table A.II investigates

the difference between excess cash and market investment using an alternative normalization

variable: the market value of net assets. The main results remain robust when using this

alternative normalization variable. In comparison to columns (4) and (5) of Table IV, the average

coefficient differences are greater in Table A.II, columns (4) and (5). When using the market

value of net assets as a normalization variable, the cash 65 -weighted average difference in

absolute coefficients is approximately 26%; the excess-cash 65 -weighted average difference in

absolute coefficients is approximately 41%.

15. A Case Study: The Regulation of Investments in Marketable Securities

Given existing regulation, can a firm make excessive market investments? What is the profile of

a firm that makes excessive market investments? To shed light on these questions, I present a

brief case study of National Presto Industries, a firm that was recently sued by the Securities and

Exchange Commission (SEC) for excessive market investments.

National Presto is a public corporation that sells small consumer appliances, adult

diapers, and ammunition. Its primary NAICS code corresponds to broad-woven fabric mills. For

52
the quarterly period ended April, 5, 2009 (unaudited), the firm has total assets of approximately

$343 million. The firm’s cash holding including cash equivalent securities is equal to

approximately $19.4 million. The firm’s total market investment (excluding cash equivalent

securities) is equal to approximately $130 million. Market investment as a percentage of net

assets is equal to approximately 61%. The firm’s market investment consists wholly of tax-

exempt securities.

National Presto found itself with a large amount of cash after a series of divestitures in

the 1970s and 1980s. The managers of the firm stated that they were seeking investment

opportunities and needed the cash to invest. Market investments made up 86% of total assets in

1994 and 92% of total assets in 1998. In 2002, the SEC filed a lawsuit against National Presto

declaring that the firm was an investment company as defined in Section 3(a)(1)(C) of the

Investment Company Act of 1940. Section 3(a)(1)(C) states that “the title, ‘investment

company,’ means any issuer which is engaged or proposes to engage in the business of investing,

reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire

investment securities having a value exceeding 40 percentum of the value of such issuer’s total

assets (exclusive of Government securities and cash items) on an unconsolidated basis.”

In November, 2005, Judge Charles R. Norgle of the U.S. District Court for the Northern

District of Illinois ruled in the SEC’s favor. In the draft injunction, the SEC allowed for National

Presto to apply for an exemption, which other firms – such as Microsoft – had done. The judge

refused the draft; National Presto responded by registering as an investment company and

replaced enough of its existing portfolio with government securities to bring its market

investments below the 40% limit. Subsequent to the 2005 ruling, Presto fell out of compliance

53
with SEC reporting rules, which prompted the New York Stock Exchange (NYSE) to warn the

firm that it could be delisted from the exchange within a year.

In May 2007, the U.S. Court of Appeals for the Seventh Circuit reversed the 2005

decision. In doing so, the Seventh Circuit relied less on the asset-based test and more on the

judgment that investors were not misled by the firm’s behavior. National Presto’s CEO Maryjo

Cohen said in a statement, “…The court’s opinion is logical and well-reasoned and is a valuable

legal precedent which will no doubt be cited in future cases.”

54
 Figure A.I. Aggregate Cash
The figure presents aggregate cash holdings for nonfarm nonfinancial corporations in the US
economy as a percentage of book value of tangible assets and the market value of tangible assets
(Federal Reserve Board of Governors). All nominal items are converted to 2005 dollars using the
Consumer Price Index.

Aggregate Cash
20
Cash (% of Tangible Assets)
5 100 15

1945 1955 1965 1975 1985 1995 2005

Year

Book Value Market Value

55
 Figure A.II. Aggregate Market Investments
The figure presents aggregate market investments for nonfarm nonfinancial corporations in the
US economy as a percentage of book value of tangible assets and the market value of tangible
assets (Federal Reserve Board of Governors). All nominal items are converted to 2005 dollars
using the Consumer Price Index. S & P 500 index is the index value at the close of the trading
day.

Aggregate Market Investments

Market Investments (% of Tangible Assets)

1500
60 80

1000
S & P 500 Index
40

500
0 20

1945 1955 1965 1975 1985 1995 2005

Year

Book Value Market Value

S & P 500 index

56
 Table A.I. Multiple Business Segments
The table presents regression results by Multiple segment status for the sample where the
dependent variables are the excess logarithm of Cash in columns (1) and (2) and the logarithm of
Market investments in columns (3) and (4). Variable definitions are presented in Table II.
(1) (2) (3) (4) (3) - (1) (4) - (2)
Single Multiple Single Multiple
Excess Excess Log(Market Log(Market Single Multiple
Log(Cash) Log(Cash) Investments) Investments) Comparison Comparison
Log (Size) 0.006 -0.014 0.829 1.156 0.823 1.170
(0.623) (1.323) (13.666)** (16.826)** [0.000]** [0.000]**
Cash flow -0.021 0.003 -0.025 -0.381 -0.004 -0.384
(1.846)+ (0.098) (0.420) (2.628)** [0.944] [0.005]**
Leverage -0.097 -0.021 -0.373 -0.226 -0.276 -0.205
(12.293)** (1.760)+ (7.764)** (3.246)** [0.000]** [0.003]**
New financing -0.000 0.021 0.269 0.067 0.269 0.046
(0.042) (0.911) (7.633)** (0.601) [0.000]** [0.674]
Market-to-book ratio -0.074 -0.003 0.222 0.171 0.296 0.174
(9.425)** (0.134) (4.352)** (1.532) [0.000]** [0.123]
R & D expense 0.132 0.205 0.299 0.379 0.167 0.174
(17.062)** (4.835)** (7.101)** (2.917)** [0.000]** [0.147]
Payout, Interest and
Investment (PII)
Repurchases -0.005 -0.026 0.062 0.035 0.067 0.061
(0.822) (1.918)+ (1.940)+ (0.580) [0.034]* [0.296]
Short-term debt ratio 0.030 0.054 0.177 0.237 0.147 0.183
(4.266)** (4.592)** (4.051)** (3.409)** [0.001]** [0.007]**
Short-term debt ratio* -0.106 -0.144 -0.230 -0.150 -0.124 -0.006
Interest expense (11.090)** (8.133)** (4.538)** (1.869)+ [0.012]* [0.947]
Interest expense 0.167 0.235 0.332 0.643 0.165 0.408
(15.367)** (11.005)** (5.967)** (7.518)** [0.002]** [0.000]**
Marginal tax rate -0.031 -0.035 -0.098 -0.177 -0.067 -0.142
(4.496)** (3.742)** (2.256)* (2.907)** [0.116] [0.018]*
Capital expenditure 0.054 0.027 0.181 0.177 0.127 0.150
(9.718)** (2.884)** (5.417)** (2.971)** [0.000]** [0.011]*
Dividend payout 0.009 0.006 0.147 0.310 0.138 0.304
(0.931) (0.534) (2.883)** (4.631)** [0.005]** [0.000]**
Avg. diff: cash eta-sq 0.140 0.241
Number of obs. 58207 29280 58207 29280
Adj. R-squared 0.124 0.090 0.116 0.149
The sample period is 1971 to 2006. Column (5) presents the difference in coefficients between columns (3) and (1); column (6) presents the
difference in coefficients between columns (4) and (2). All regressions use year and industry effects. Heteroscedasticity-robust standards errors
are estimated and corrected for clustering at the firm level. Absolute t-statistics are reported in parentheses in columns (1), (2), (3) and (4). The p-
values for a generalized Hausman test are reported in brackets in columns (5) and (6); the null hypothesis is that the difference in the coefficients
is zero. The average difference in significant (10% or less) coefficients for the PII variables is calculated using eta-squared weights for the
respective cash regressions. The adjusted R-squared measures the fit. +, *, ** denote statistical significance at the 10%, 5% and 1% levels.

57
 Table A.II. Alternative Normalization: Market Value of N. Assets
The table presents regression results for the sample where the dependent variables are the
logarithm of Cash in column (1) the excess logarithm of Cash in column (2) and the logarithm of
Market investments in column (3). Variable definitions are presented in Table II.
(1) (2) (3) (3) - (1) (3) - (2)
Excess Log(Market Cash E. Cash
Log(Cash) Log(Cash) Investments) Comparison Comparison
Log (Size) -0.253 -0.015 1.101 1.354 1.116
(17.810)** (2.285)* (26.663)** [0.000]** [0.000]**
Cash flow -0.019 -0.070 -0.369 -0.350 -0.299
(1.725)+ (11.010)** (12.491)** [0.000]** [0.000]**
Leverage -0.558 -0.130 -0.572 -0.014 -0.442
(33.911)** (15.972)** (12.956)** [0.743] [0.000]**
New financing 0.132 0.013 -0.004 -0.136 -0.017
(17.404)** (3.143)** (0.178) [0.000]** [0.400]
Market-to-book ratio -0.175 0.132 0.093 0.268 -0.039
(13.161)** (16.242)** (2.643)** [0.000]** [0.279]
R & D expense 0.139 0.115 0.246 0.107 0.131
(12.707)** (17.861)** (7.974)** [0.001]** [0.000]**
Payout, Interest and
Investment (PII)
Repurchases -0.021 -0.007 -0.060 -0.039 -0.053
(2.350)* (1.455) (2.293)* [0.132] [0.037]*
Short-term debt ratio -0.006 0.009 0.049 0.055 0.040
(0.495) (1.712)+ (1.497) [0.093]+ [0.215]
Short-term debt ratio* -0.164 -0.086 -0.161 0.003 -0.075
Interest expense (10.953)** (11.202)** (4.169)** [0.928] [0.048]*
Interest expense 0.441 0.259 0.823 0.382 0.564
(24.695)** (25.650)** (17.223)** [0.000]** [0.000]**
Marginal tax rate 0.001 -0.005 -0.108 -0.109 -0.103
(0.119) (0.992) (3.388)** [0.001]** [0.001]**
Capital expenditure 0.137 0.087 0.302 0.165 0.215
(13.331)** (17.594)** (10.995)** [0.000]** [0.000]**
Dividend payout 0.048 0.021 0.350 0.302 0.329
(3.571)** (3.645)** (9.544)** [0.000]** [0.000]**
Avg. diff: cash eta-sq 0.264 0.406
Number of obs. 108452 108452 108452
Adj. R-squared 0.099 0.129 0.139
The sample period is 1971 to 2006. Column (4) presents the difference in coefficients between columns (3) and (1); column (5) presents the
difference in coefficients between columns (3) and (2). All regressions use year and industry effects. Heteroscedasticity-robust standards errors
are estimated and corrected for clustering at the firm level. Absolute t-statistics are reported in parentheses in columns (1), (2) and (3). The p-
values for a generalized Hausman test are reported in brackets in columns (4) and (5); the null hypothesis is that the difference in the coefficients
is zero. The average difference in significant (10% or less) coefficients for all variables (column 4) or the PII variables (column 5) is calculated
using eta-squared weights for the respective cash regressions. The adjusted R-squared measures the fit. +, *, ** denote statistical significance at
the 10%, 5% and 1% levels.

58