Can Changes in the Cost of Carry Explain the Dynamics of Corporate 'Cash' Holdings?
University of Navarra, IESE Business School
Martin C. Schmalz
University of Michigan, Stephen M. Ross School of Business
October 17, 2015
Review of Financial Studies, April 2016
Ross School of Business Working Paper No. 1216
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.
Number of Pages in PDF File: 55
Keywords: corporate cash, cash hoarding, money demand
JEL Classification: G30, G32, E41, E44
Date posted: December 14, 2013 ; Last revised: November 19, 2016