Jurnal of Finance - Precautionary Savings with Risky Assets: When Cash Is Not Cash
RAN DUCHIN,THOMAS GILBERT,JARRAD
HARFORD,CHRISTOPHER HRDLICKA
ABSTRACT
U.S. industrial firms invest heavily in noncash,
risky financial assets such as corporate debt, equity, and mortgage-backed
securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of
total book assets. We present a formal model to assess the optimality of this
behavior. Consistent with the model, risky assets are concentrated in
financially unconstrained firms holding large financial portfolios, are held by
poorly governed firms, and are discounted by 13% to 22% compared to safe
assets. We conclude that this activity represents an unregulated asset
management industry of more than $1.5 trillion, questioning the traditional
boundaries of nonfinancial firms.
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