The Marginal Value of Cash: Estimates from a Structural Model
2021-11-10 16:06:00
How much value does an additional dollar of cash create for a firm? It is generally recognized that the marginal value of cash (MVC) can either exceed or fall below one dollar. Estimates of MVC can guide corporate cash and payout policy, indicate the quality of governance, and make a firm a target for takeover or activism. Yet, the existing methods of estimation lack a rigorous theoretical foundation and often provide implausibly high or low estimates. In this paper, we provide a formulation of MVC and estimate MVC based on a model which encompasses the important determinants for the choice of cash savings, including financing and agency costs. We find that firms with large cash and capital stocks have higher marginal value of cash. In recent years, firms that pay out more exhibit higher MVC than those that pay out less. Two quasi-natural experiments validate the MVC estimates.