Costly external finance and corporate investment: The role of marketable securities

Abstract

This paper demonstrates that the precautionary role of cash depends critically on its composition. We show that, following the onset of the global financial crisis, firms with similar total cash reserves experience significantly different investment declines based on the proportion held in marketable securities. Consistent with theory, these results are driven by firms with a greater reliance on external capital. We conduct several tests to address potential endogeneity concerns. We conclude that firms with seemingly adequate precautionary savings in aggregate may still be highly exposed to shocks if their cash holdings are heavily invested in marketable securities.