Bonding with risk: Corporate investment and savings in risky financial assets

We study the rationale behind firms’ investment in risky financial assets by formulating and estimating a dynamic model in which firms allocate their precautionary savings to both safe and risky securities. In equilibrium, risky financial asset holdings are positively related to the sensitivity of a firm’s financing deficit to the risky asset returns—the “financing deficit beta”. Using a comprehensive sample of US corporate financial asset holdings, we find evidence of a positive correlation between risky financial asset holdings and financing deficit betas that capture firms’ incentives to hedge interest-rate risk. Precautionary motives are stronger in small, high-volatility, and R&D-intensive firms.