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Can Changes in the Cost of Carry Explain the Dynamics of Corporate 'Cash' Holdings?

Review of Financial Studies, April 2016

Ross School of Business Working Paper No. 1216

55 Pages Posted: 14 Dec 2013 Last revised: 30 Sep 2017

José Azar

University of Navarra, IESE Business School

Jean-François Kagy

Cornerstone Research

Martin C. Schmalz

University of Michigan, Stephen M. Ross School of Business

Date Written: October 17, 2015

Abstract

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

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

José Azar

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Jean-François Kagy

Cornerstone Research ( email )

1000 El Camino Real
Menlo Park, CA 94025-4327
United States

Martin C. Schmalz (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan St
R5456
Ann Arbor, MI 48109-1234
United States
7347630304 (Phone)

HOME PAGE: http://https://sites.google.com/site/martincschmalz/

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