Corporate Money Demand
59 Pages Posted: 19 Apr 2018 Last revised: 26 May 2020
Date Written: October 9, 2018
We document a hump-shaped relation between corporate cash and both real and nominal interest rates in both aggregate and firm-level data. We rationalize this result in a model where firms finance investment with cash and risky debt. The risky rate rises endogenously with the risk-free rate, spurring precautionary cash demand. Simultaneously, foregone interest lowers cash demand. The first mechanism dominates at low interest rates, and the second at high interest rates. The model matches several data moments and reproduces a nonmonotonic cash-interest relation. This nonmonotonicity implies that interest rates are unlikely behind the recent rise in corporate cash.
Keywords: Corporate Cash Holdings, Interest Rates, Debt Cost, Financial Frictions; Structural Estimation
JEL Classification: E41, E43, G12, G32
Suggested Citation: Suggested Citation