Cash Holdings, Market Frictions and Monetary Policy: An Investigation of Increase in Cash Holdings

Abstract:     
We investigate the secular increase in the corporate cash holding over the period 1980-2006. We show that along with firm characteristic–related variables, monetary policy and banking structure have a significant bearing on corporate cash holdings, as they determine the opportunity cost of holding cash as well as access to cash. Specifically, we establish that the need to hold cash was complemented by the ability to hold cash during the given period due to low opportunity cost. We also investigate the role of cash as collateral for financially constrained firms. Our findings allow us to provide insight into the cross-sectional variation.

Number of Pages in PDF File: 56

Keywords: Bank loan, Cash holding, Interest rate, Monetary policy, Option value

JEL Classification: G00, G21, G30, G32, M10, M14

working papers series