Review of Financial Studies, April 2016
55 Pages Posted: 14 Dec 2013 Last revised: 30 Sep 2017
Date Written: October 17, 2015
Firms until recently were effectively constrained to hold liquid assets in non-interest-bearing accounts. As a result, the cost of capital of firms' liquid assets portfolios exceeded the return, especially when the risk-free interest rate was high. The spread between cost and return is the cost of carry. Changes in the cost of carry explain the dynamics of corporate "cash" holdings both in the United States and abroad, and the level of cost of carry explains the level of liquid asset holdings across countries. We conclude that current US corporate cash holdings are not abnormal in a historical or international comparison.
Keywords: corporate cash, cash hoarding, money demand
JEL Classification: G30, G32, E41, E44
Suggested Citation: Suggested Citation
Azar, José and Kagy, Jean-François and Schmalz, Martin C., Can Changes in the Cost of Carry Explain the Dynamics of Corporate 'Cash' Holdings? (October 17, 2015). Review of Financial Studies, April 2016; Ross School of Business Working Paper No. 1216. Available at SSRN: https://ssrn.com/abstract=2367162 or http://dx.doi.org/10.2139/ssrn.2367162