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Corporate cash holdings and monetary shocks: A test of the credit channel theory

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  • Yiling Deng
  • Haibo Yao

Abstract

This paper studies the impact of monetary shocks on corporate cash holdings before the 2008 financial crisis. We find evidence supporting the credit channel theory that industrial firms increase cash holdings when monetary policy is unexpectedly tightened. The impact is more pronounced for financially constrained, high managerial compensation incentives, domestic firms, and during recession. Furthermore, we examine the structural increase in cash holdings in the 2000s, we find that industrial firms continuously increase cash holdings when monetary policy is persistently and unexpectedly tightened, which overweighs the reversal effect of monetary policy.

Suggested Citation

  • Yiling Deng & Haibo Yao, 2021. "Corporate cash holdings and monetary shocks: A test of the credit channel theory," Review of Financial Economics, John Wiley & Sons, vol. 39(2), pages 203-222, April.
    • Handle: RePEc:wly:revfec:v:39:y:2021:i:2:p:203-222
    DOI: 10.1002/rfe.1117
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