Abstract

Some estimates of the marginal values of cash reported in existing literature appear inconsistent with economic common sense. We establish reasonable benchmark values for the marginal value of cash based on economic theory and empirical evidence. In various samples and contexts, the estimates of the marginal value of cash violate their respective benchmarks. Furthermore, we propose a diagnostic test to examine the reliability of the estimation methodology. The estimates fail the test. The existing methodology of Faulkender and Wang (2006) for estimating the marginal value of cash is unreliable, and empirical estimates that result should be treated with caution.