What Drives Corporate Savings

Nan Chen, Xavier Giroud, Ling Qin and Neng Wang

No 34622, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We study the determinants of corporate cash holdings by extending the standard q theory of investment with financing frictions and productivity shocks. While existing models predict a low propensity to hold cash, we show that realistic cash holdings arise only when three ingredients are combined: 1.) costly external financing, 2.) persistent productivity shocks, and 3.) contemporaneous productivity shocks. With costly external financing, persistent productivity shocks generate predictable cash flows and investment opportunities, but yield little need for savings since the internally generated cash flows are aligned with the investment needs. Contemporaneous shocks make internally generated cash flows random, inducing firms to hold cash at levels consistent with those observed empirically.

JEL-codes: C61 D92 G31 G32 (search for similar items in EconPapers)
Date: 2026-01
Note: AP CF
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