Corporate Money Demand

65 Pages Posted: 19 Apr 2018 Last revised: 15 Oct 2018

See all articles by Xiaodan Gao

Xiaodan Gao

National University of Singapore

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Na Zhang

Fudan University - Department of Finance

Date Written: October 9, 2018

Abstract

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

Gao, Xiaodan and Whited, Toni M. and Zhang, Na, Corporate Money Demand (October 9, 2018). Available at SSRN: https://ssrn.com/abstract=3165532 or http://dx.doi.org/10.2139/ssrn.3165532

Xiaodan Gao

National University of Singapore ( email )

15 Kent Ridge Drive
Mochtar Riady Building, #6-50
Singapore, Singapore 119245
Singapore
(+65)66013543 (Phone)
(+65)67795059 (Fax)

Toni M. Whited (Contact Author)

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

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Na Zhang

Fudan University - Department of Finance ( email )

Shanghai, 200433
China

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