Research Project description Finance1
“Why have firms cash holdings increased lately?”
北美Finance财政金融代写 Generate the variables inv (investment as percentage of book value) and cash (cash holdings as a percentage of book holdings).
One of the big questions in corporate finance currently being discussed is the finding that corporate investment in tangible assets has substantially decreased in the past 30 years, while cash holdings haveincreased at the same time. The decline in investment is present even relative to investment opportunities (i.e. a decline in investment opportunities cannot explain it) and relative to cash flow or profits (ie changes over time of internal funds also cannot not explain it). In this exercise you are asked to replicate those findings on a dataset of the 100 largest US firms over the period 1980 to 2017.
More specifically, in the paper of Bates et al. (2009), that you are recommended to read (mainunderstanding), the authors argue that an increase in volatility may be partly responsible for the increased cash holdings of firms. In Figure 2 of their paper, the authors show that firms operating in sectors with the highest growth in volatility (defined as the sector average standard deviation in cash holdings over a 10 year period) also show the highest increase in cash holdings. This suggests that increased volatility can at least partly explain the increase in cash holdings of firms. The aim of this project is to investigate to what extent the increase in cash holdings can be explained by an increase in volatility. 北美Finance财政金融代写
The two data files for this project contain (i) financial indicators of the 100 largest firms drawn from Compustat and (ii) a data file that has a firm-year volatility measure computed by taking the standard deviation in firms cash holdings over a 5 year period (minimum 2).
With these data files, students have to (i) show in a graph that cash holdings as percentage of book value of assets has increased over time, while investment as percentage of book value of assets has decreased at the same time; (ii) show in two regressions what the average increase (decrease) in cash (investment) holdings is per year and test significance; (iii) merge the volatility data and show that the yearly increase in cash holdings is lower when controlling for volatility (iv) show that this result remains after removing the 5 largest values (outliers) of cash holdings and volatility; (v) interpret what percentage of the trend in cash holdings is due to volatility increase. Finally, they have to describe these findings in a coherent paper.
The papers and data file are available for download on Blackboard.
Some tips to help you with the analysis 北美Finance财政金融代写
- To merge the data, check which variable the two files have in common.
- Generate the variables inv (investment as percentage of book value) and cash (cash holdings as a percentage of book holdings). Do this in two steps. Step one: write down the fraction. Step two: use replace inv = inv *100. Do the same for cash. Now you have investment and cash as a percentage of book value.
- For question I,type:
collapse cash inv (semean) c_se = cash i_se = inv (count) n=cash, by(year) twoway (line cash year) (line inv year), name(gr1)
twoway (scatter cash year [aweight=1/c_se], ms(Oh) mc(blue)) /// (scatter inv year [aweight=1/i_se], ms(Oh) mc(black)) ///
(lfit cash year, lc(blue)) (lfit inv year, lc(black)), name(gr2) 北美Finance财政金融代写
restore
- Rewrite the variable year: replace year = year –2000.
- In question ii do the regression using all observations and once while you exclude the companies for which you have no on volatility. At the end of the regression you write in that case if ‘variable’ ==0. Mind though that you still have to decide which variable you have to set to zero.
1 Developed by Florian Peters and Tomislav Ladika.
6. To find the outliers type: tab cash cash_vol. Find the five largest values. Generate a new variable: gen insmpl = (cash< x) * (cash_vol<y). Fill in for x and y the cut-off points you found in the tab table (the lowest value of the five largest values).
- Question v can also be calculated using your calculator.
Key reference 北美Finance财政金融代写
Bates, Kahle and Stulz (2009). Why Do U.S. Firms Hold so Much More Cash than They Used to? Journal of Finance 64(5), 1985-2022
Related references
Gutierrez and Philippon (2017) Declining Competition and Investment in the U.S. NBER Working Paper23583.
Jones and Philippon (2016) The Secular Stagnation of Investment? Working Paper.
Lee, Shin and Stulz (2015) Why Does Capital no Longer Flow More to the Industries with the Best Growth Opportunities? NBER Working Paper 22924.
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