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

This abstract relates to the following paper:BesarD., BoothP., ChanK.K., MilneA.K.L. & PicklesJ.Systemic risk in financial services ‐ Abstract of the London Discussion. British Actuarial Journal, doi:10.1017/S1357321711000110

Systemic risk in financial services ‐ Abstract of the London Discussion

This paper analyses contingent-claims based measures of distance to default (D2D) for the 41 largest global banking institutions over the period 2006H2 to 20011H2. D2D falls from end-2006 through to end-2008. Cross-sectional differences in D2D prior to the crisis do not predict either bank failure or bank share prices decline, but D2D measured in mid-2008 does have some predictive value for failure by end-year. The ‘option value’ of the bank safety net remains small except at the height of the crisis and there is little indication of bank shareholders consciously using the safety net to shift risk onto taxpayers. (99 words)

Distance to Default and the Financial Crisis

Financial Technologies and Financial Regulation

We study the impact of financing constraints on investment and output dynamics, in a continuous time setting with output a linear function of capital. Decline of net worth reduces investment and, if firms can rent capital to unconstrained outside investors, can create a 'net worth trap' with both investment and output falling below normal levels for long time periods. We provide a detailed account of our model solution and discuss both the economic intuition underpinning our results and the implications for macroeconomic modeling. Keywords: cash flow management, corporate prudential risk, financial accelerator, financial distress, induced risk aversion, liquidity constraints, liquidity risk, macroeconomic propagation, multiperiod financial management, non-linear macroeconomic modelling, Tobin's q, precautionary savings

The net worth trap: investment and output dynamics in the presence of financing constraints

We study the role of technology in providing working capital finance to small and medium-sized enterprises. Our analysis discusses the variety of forms of working capital and the range of ways that it can be provided. It also examines some prominent case studies, including: Ant financial services; OnDeck; Kabbage; Biz2credit; Amazon Lending; Market Invoice and Funding Circle. Some of these firms are successfully tapping niche market serving the demands of firms too small to obtain credit from conventional banks. However, the magnitude of this type of lending remains small compared to the overall working capital finance market which continues to be bank dominated. Our main conclusion is that, while technology has the potential to significantly lower costs and improve the access of smaller firms to short-term finance, there is still a long way to go for these benefits to be fully realised and doing so requires a range of supporting policy measures.

Alistair Milne

Papers

Systemic risk in financial services ‐ Abstract of the London Discussion

Distance to Default and the Financial Crisis

Financial Technologies and Financial Regulation

The net worth trap: investment and output dynamics in the presence of financing constraints

Technology and Working Capital Finance