Corporate Money Demand
65 Pages Posted: 19 Apr 2018 Last revised: 15 Oct 2018
Date Written: October 9, 2018
We document a nonmonotonic relation between interest rates and corporate cash, which we rationalize in a model where firms finance investment with cash and risky debt. The model matches several features of the data and reproduces our finding of a nonmonotonic cash-interest relation. The risky rate rises endogenously with the risk-free rate, thus spurring precautionary, balance-sheet dressing, and transactions demand. Simultaneously, income effects and foregone interest earnings lower cash demand. The first three mechanisms dominate the second two at low, but not high, interest rates. This nonmonotonicity has implications for the welfare cost of inflation and high corporate cash levels.
Keywords: Corporate Cash Holdings, Interest Rates, Debt Cost, Financial Frictions; Structural Estimation
JEL Classification: E41, E43, G12, G32
Suggested Citation: Suggested Citation