Faculty & Research

Abstract:

Newly public firms hold substantially higher levels of cash than mature firms, and these substantially‐higher cash holdings remain relatively stable for extended periods after the IPO. While cash has been shown to provide both potential benefits and costs to firms, we find that the benefits outweigh the costs for newly public firms. For example, higher cash holdings significantly increase the probability of survival for newly public firms – but not for mature firms. The market recognizes that high cash balances yield net benefits to IPO firms – one dollar of cash is worth approximately 30% more to IPO firms than to mature firms, and a portfolio of high‐cash IPO firms earns 60 to 80 basis points per month more over a 36‐month period than a portfolio of low‐cash IPO firms. Finally, we find that the dynamics of cash differ significantly for IPO firms with versus without pre‐IPO syndicated loans; firms without such loans have greater uncertainty regarding access to post‐IPO financing, and this uncertainty causes the firms to hold more cash and the market to value this cash more highly.