Firm Selection and Corporate Cash Holdings∗

The gradual replacement of traditional U.S. public companies by more R&D-intensive firms is key to understanding the secular trend in average cash-holdings. Over the last 35 years, an increasing share of R&D—intensive firms has entered the stock market with progressively higher cash-balances. This positive entry-effect dominates the negative within-firm effect post IPO. We build a firm industry model with endogenous entry to quantify the importance of two competing selection mechanisms: an increasing share of R&D–intensive firms in the overall economy and more favorable IPO conditions. Only the combination of both mechanisms successfully generates a sizable secular increase. ∗ We are grateful to Rui Albuquerque, Andrea Buffa, Gian Luca Clementi, Marco Da Rin, Joan FarreMensa, Fritz Foley, Pablo Kurlat, Evgeny Lyandres, Stefano Sacchetto, Martin Schmalz, Ken Singleton, Anna-Leigh Stone, and Toni Whited as well as seminar attendants at Boston University, Harvard University, IDC 2015 Summer Conference, SED 2015 meeting in Warsaw, Tepper-LAEF 2015 Conference on “Advances in Macro-Finance”, Christmas meeting 2016 at LMU, Utah Winter Finance 2016 conference, Midwest Finance Association, and SUNY at Stony Brook for their comments and suggestions. All remaining errors are our own responsibility. Correspondence: Juliane Begenau ([email protected]) and Berardino Palazzo ([email protected]).