Cash Holdings and the Selection Effect in the Eurozone

We document an increase in the average cash holdings of public firms in the Eurozone core countries between 1986 and 2015. A significant jump in the time series at the end of the 1990s accounts for most of the observed change during the sample period. We can attribute this jump to a sudden modification in the composition of the population of public firms (selection effect), particularly the increase in the proportion of cash-rich R&D-intensive firms with high growth opportunities. Most of these firms belong to the healthcare and technology industries, which may have benefited from favorable IPO conditions within this specific period. Neither the changes in firms’ characteristics nor those in firms’ cash policies significantly justify the observed trend in average cash holdings (no within effect). At the country level, differences in average cash holdings are mainly justified by heterogeneous proportions of R&D-intensive firms across countries and not by differences in countries’ financial development or legal environment.