We examine the determinants and implications of holdings of cash and marketable" securities by publicly traded U.S. firms in the 1971-1994 period. Firms with strong growth" opportunities and riskier cash flows hold relatively high ratios of cash to total assets. Firms" that have the greatest access to the capital markets (e.g. large firms and those with credit" ratings) tend to hold lower ratios of cash to total assets. These results are consistent with the" view that firms hold liquid assets to ensure that they will be able to keep investing when cash" flow is too low relative to planned investment and when outside funds are expensive. The" short run impact of excess cash on capital expenditures, acquisition spending and payouts to" shareholders is small. The main reason that firms experience large changes in excess cash is" the occurrence of operating losses. There is no evidence that risk management and cash" holdings are substitutes.

The Determinants and Implications of Corporate Cash Holdings

The East Asian miracle: Economic growth and public policy: By the World Bank. (New York: Oxford University Press for the World Bank, 1993. 389 pp. $19.95, paper.)

The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Precautionary Saving in the Small and in the Large

Few areas of monetary economics have been studied as extensively as the transmission mechanism. The literature on this topic has evolved substantially over the years, following the waxing and waning of conceptual frameworks and the changing characteristics of the financial system. In this paper, taking as a starting point a brief overview of the extant work on the interaction between capital regulation, the business cycle and the transmission mechanism, we offer some broader reflections on the characteristics of the transmission mechanism in light of the evolution of the financial system. We argue that insufficient attention has so far been paid to the link between monetary policy and the perception and pricing of risk by economic agents - what might be termed the "risk-taking channel" of monetary policy. We develop the concept, compare it with current views of the transmission mechanism, explore its mutually reinforcing link with "liquidity" and analyse its interaction with monetary policy reaction functions. We argue that changes in the financial system and prudential regulation may have increased the importance of the risk-taking channel and that prevailing macroeconomic paradigms and associated models are not well suited to capturing it, thereby also reducing their effectiveness as guides to monetary policy.

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Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism?

13 EADERS of Mr. Bertrand Russell's philosophical £v works know that one of his pupils before the outbreak of the war, an Austrian, Mr. Ludwig Wittgenstein, caused him to change his views in some important particulars. Curiosity can now be satisfied. The “Tractatus Logico-Philosophicus “which Mr. Ogden has included in his new library of philosophy is a remarkable and strikingly original work. It is published in German and English in parallel pages. It is difficult to appreciate the reason for this, seeing that the author is evidently familiar with our language and has himself carefully revised the proofs of the translation. Also we should have liked to have the Tractatus without Mr. Russell's Introduction, not, we hasten to add, on account of any fault or shortcoming in that introduction, which is highly appreciative and in part a defence of himself, in part explanatory of the author, but for the reason that good wine needs no bush and that Mr. Russell's bush has the unfortunate effect of dulling the palate instead of whetting the appetite. In his penultimate sentence Mr. Russell says; “To have constructed a theory of logic which is not at any point obviously wrong is to have achieved a work of extraordinary difficulty and importance.” We agree, but how uninspiring when compared with Mr. Wittgenstein's own statement of aim: “What can be said at all can be said clearly, and whereof one cannot speak, thereof one must be silent.” Tractatus Logico-Philosophicus. By Ludwig Wittgenstein. (International Library of Psychology, Philosophy and Scientific Method.) Pp. 189. (London: Kegan Paul and Co., Ltd.; New York: Harcourt, Brace and Co., Inc., 1922.) 10s. 6d. net.

Tractatus Logico-Philosophicus

We correct the analysis of the model of time to build in Majd and Pindyck (1987 Journal of Financial Economics 18, 7-27) for the omission of an essential optimality condition Our analysis reveals an additional insight: long times to build reduce the effects of increased project value volatility (ie, higher investment thresholds) in comparison to standard real option models of investment under uncertainty, where investment is instantaneous Thus, a 'naive' NPV rule can sometimes be an appropriate initial guide to investment

'Time to Build, Option Value and Investment Decisions': A Comment

The financial crisis of the past three years has been the most severe episode of global financial instability since the 1930s. It has resulted in a marked decline of world trade, and the first global aggregate fall in economic activity and output for more than 70 years.The response by policy makers has been equally dramatic. They have thrown away their rulebooks, applying huge monetary and fiscal stimulus and providing massive financial support to banks and other financial intermediaries.

Macro-Prudential Policy: An Assessment

Although a great deal of attention has been paid to IMF conditionality and to the effects of IMF programmes, relatively little attention has been paid to their completion rate. However, the record is that the clear majority of Fund programmes are uncompleted. Is this a cause for concern and why is it that the completion rate is low? In principle, a number of factors could be at work. Gaining a better understanding of what these are should allow policy reform at the IMF to improve performance. While there are things that we do not know and need to know about programme completion, we know enough to delineate the broad direction that policy should take.

Debt Relief for Low Income Countries: Is it Effective and Efficient?

We use arbitrage arguments to characterise the relationship between required shareholder returns and the exposure to downside risk, as measured by VaR at stated confidence level and time horizon. We show that skewness and diversification have a major impact on zero-NPV RAROC (return on capital) hurdles, implying that use of return on capital with a constant hurdle rate can lead to substantial loss of shareholder value. We propose an alternative performance measure consistent with standard valuation models and discuss implications for prudential regulation.[93 words]

Alistair Milne

Papers

'Time to Build, Option Value and Investment Decisions': A Comment

Macro-Prudential Policy: An Assessment

Debt Relief for Low Income Countries: Is it Effective and Efficient?

The relationship between risk capital and required returns in financial institutions: some preliminary results

Can central bank provision of market liquidity create a problem of moral hazard