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

29 Pages Posted: 29 Aug 2012 Last revised: 19 Oct 2016

See all articles by Anna-Leigh Stone

Anna-Leigh Stone

Samford University

Benton E. Gup

University of Alabama - Culverhouse College of Commerce & Business Administration

Junsoo Lee

University of Alabama - Department of Economics, Finance and Legal Studies

Date Written: December 11, 2015

Abstract

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

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

Anna-Leigh Stone (Contact Author)

Samford University ( email )

800 Lakeshore Drive
Birmingham, AL 35229
United States

Benton E. Gup

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

Junsoo Lee

University of Alabama - Department of Economics, Finance and Legal Studies ( email )

P.O. Box 870244
Tuscaloosa, AL Alabama 35487
United States
2053488978 (Phone)

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