New Insights about the Relationship between Corporate Cash Holdings and Interest Rates

Between 1970 and 2014 the federal funds rate soared from approximately 7.18% to 16.38%, and subsequently declined to 0.09%. Based on economic theory, corporate cash holdings should have moved inversely with these interest rate swings. Using a new measure of cash holdings and a random effects threshold model, we examine this relationship over the past four and a half decades and show that the expected negative relationship does not exist. Furthermore, some established motives for cash holdings do not explain these results. Using a quantile regression, we show that a positive relationship between cash holdings and interest rates exists among all quantiles of cash holdings. All of these results imply that there is not one particular group of firms that is driving the positive relationship and a revised theory of the relationship between interest rates and cash holdings may be warranted.

Keywords: cash, cash holdings, interest rates, federal funds rate

JEL Classification: G30, G32

Suggested Citation: Suggested Citation

Stone, Anna-Leigh and Gup, Benton E. and Lee, Junsoo, New Insights about the Relationship between Corporate Cash Holdings and Interest Rates (December 11, 2015). Midwest Finance Association 2013 Annual Meeting Paper, Journal of Economics and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2138377 or http://dx.doi.org/10.2139/ssrn.2138377