Corporate Money Demand

59 Pages Posted: 19 Apr 2018 Last revised: 26 May 2020

See all articles by Xiaodan Gao

Xiaodan Gao

National University of Singapore

Toni M. Whited

University of Michigan, Department of Economics; National Bureau of Economic Research

Na Zhang

Fudan University - Department of Finance

Date Written: October 9, 2018

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 behind the recent rise in corporate cash.

Keywords: Corporate Cash Holdings, Interest Rates, Debt Cost, Financial Frictions; Structural Estimation

JEL Classification: E41, E43, G12, G32

Suggested Citation

Gao, Xiaodan and Whited, Toni M. and Zhang, Na, Corporate Money Demand (October 9, 2018). Available at SSRN: https://ssrn.com/abstract=3165532 or http://dx.doi.org/10.2139/ssrn.3165532

Xiaodan Gao

National University of Singapore ( email )

15 Kent Ridge Drive
Mochtar Riady Building, #6-50
Singapore, Singapore 119245
Singapore
(+65)66013543 (Phone)
(+65)67795059 (Fax)

Toni M. Whited (Contact Author)

University of Michigan, Department of Economics ( email )

735 S. State Street
Ann Arbor,, MI 48109

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Na Zhang

Fudan University - Department of Finance ( email )

Shanghai, 200433
China

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