Patrick Bolton, Huntley Schaller, and Neng Wang

Working Paper, 2013


This paper provides a non-parametric empirical analysis of the structural model of corporate savings and investment by Bolton, Chen and Wang (2011). The key variable of that model is the firm’s cash-to-capital ratio w. Firm value is increasing and concave in w, and the firm’s marginal value of cash is decreasing in w. As a result, investment is increasing in w. These predictions and other less obvious results of the model are confirmed by our empirical analysis. A major finding of our analysis is that on average, the value of capital for a firm is increasing and concave in the corporation’s cash-to-capital ratio. Moreover, the slope of this value function, which measures the corporation’s marginal value of cash, is decreasing in the cash-to-capital ratio w as predicted by the model. Together, these findings provide a parsimonious and powerful explanation of US corporate savings and investment behavior.

View the paper hereThe Marginal Value of Cash and Corporate Savings