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Corporate Money Demand
[Financial innovation and the transactions demand for cash]

Author

Listed:
  • Xiaodan Gao
  • Toni M Whited
  • Na Zhang

Abstract

We document a hump-shaped relation between corporate cash and both real and nominal interest rates in both aggregate and firm-level data. We rationalize this result in a model where firms finance investment with cash and risky debt. The risky rate rises endogenously with the risk-free rate, spurring precautionary cash demand. Simultaneously, foregone interest lowers cash demand. The first mechanism dominates at low interest rates, and the second at high interest rates. The model matches several data moments and reproduces a nonmonotonic cash–interest relation. This nonmonotonicity implies that interest rates are unlikely to be behind the recent rise in corporate cash.

Suggested Citation

  • Xiaodan Gao & Toni M Whited & Na Zhang, 2021. "Corporate Money Demand [Financial innovation and the transactions demand for cash]," The Review of Financial Studies, Society for Financial Studies, vol. 34(4), pages 1834-1866.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:4:p:1834-1866.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa083
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    Citations

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    Cited by:

    1. Edoardo Rainone, 2022. "Currency demand at negative policy rates," Temi di discussione (Economic working papers) 1359, Bank of Italy, Economic Research and International Relations Area.
    2. Ysmailov, Bektemir, 2021. "Interest rates, cash and short-term investments," Journal of Banking & Finance, Elsevier, vol. 132(C).
    3. Eskandari, Ruhollah & Zamanian, Morteza, 2022. "Cost of carry, financial constraints, and dynamics of corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 74(C).
    4. Antonio Falato & Dalida Kadyrzhanova & Jae Sim & Roberto Steri, 2022. "Rising Intangible Capital, Shrinking Debt Capacity, and the U.S. Corporate Savings Glut," Journal of Finance, American Finance Association, vol. 77(5), pages 2799-2852, October.
    5. Altavilla, Carlo & Burlon, Lorenzo & Giannetti, Mariassunta & Holton, Sarah, 2022. "Is there a zero lower bound? The effects of negative policy rates on banks and firms," Journal of Financial Economics, Elsevier, vol. 144(3), pages 885-907.
    6. Francisco Salas-Molina & Juan A. Rodríguez-Aguilar & Montserrat Guillen, 2023. "A multidimensional review of the cash management problem," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-35, December.
    7. Martin Farias, 2024. "The Allocation of Cash Flow by Spanish Firms: New Evidence on the Impact of Financial Frictions," Working Papers wp2024_2409, CEMFI.
    8. Miguel H. Ferreira, 2023. "Aggregate Implications of Corporate Bond Holdings by Nonfinancial Firms," Working Papers 967, Queen Mary University of London, School of Economics and Finance.
    9. Li, Xiaodan & Pan, Zikui & Ho, Kung-Cheng & Bo, Yu, 2024. "Epidemics, local institutional quality, and corporate cash holdings," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 193-210.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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