Precautionary Savings with Risky Assets: When Cash Is Not Cash

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CFA Digest
August 2017 | Vol. 47 | No. 8
Source: CFA Institute
Ran Duchin Thomas Gilbert Jarrad Harford Christopher Hrdlicka
Imrith Ramtohul, CFA (Reviewer)

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Summary

US industrial firms tend to invest significantly in noncash risky financial assets—for example, corporate debt, equity, and mortgage-backed securities. Such risky assets make up 38% of the firms’ financial portfolios, or 6% of total book assets. These assets are held mainly by financially unconstrained firms and by poorly governed firms. Nonfinancial firms may thus be operating in a “shadow” asset management industry subject to minimal regulation and disclosure requirements.

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