Itshouldbenotedthatallofthesestudiesarebasedonvery
largesamplesofdiversefirms.Whiletheyalltrytocontrol
fordifferencesacrossfirmsusingproxiesforgrowthandrisk,
theregressions themselves havelimited explanatory power
and theproxies arenotprecise. Forinstance, thehistorical
salesgrowthisanimperfectproxyforfuturegrowth;thiscan
translate into large shifts in the coefficients on cash. The
bottomlineisthatthestudiesallagreethatthemarkettreatsa
dollarincashdifferentlyinthehandsofdifferentfirms,and
thatwecannotautomaticallyassumethatcashwillbevalued
at face value at all firms.
FINANCIAL INVESTMENTS
Sofarinthischapter,wehavelookedatholdingsofcashand
near-cashinvestments. Insomecases, firmsinvestin more
risky securities, which can range from investment-grade
bondstohigh-yieldbondstopubliclytradedequityinother
firms. In this section, we examine the motivation,
consequences, and accounting for such investments.
Reasons for Holding Risky Securities
Whydofirmsinvestinriskysecurities?Somefirmsdosofor
the allure of the higher returns they can expect to make
investinginstocksandcorporatebonds,relativetoTreasury
bills.Inrecentyears,therehasalsobeenatrendforfirmsto
takeequitypositionsinotherfirmstofurthertheirstrategic
interests.Stillotherfirmstakeequitypositionsinfirmsthey
viewasundervaluedbythemarket.Andfinally,investingin
riskysecuritiesispartofdoingbusinessforbanks,insurance
companies, and other financial services companies.