Cost of carry, financial constraints, and dynamics of corporate cash holdings

Ruhollah Eskandari and Morteza Zamanian

Journal of Corporate Finance, 2022, vol. 74, issue C

Abstract: This paper provides new evidence on how the cost of carry is linked to corporate cash policy in the presence of financial frictions. Using both time-series and firm-level data for US public and private manufacturing firms, we find a negative correlation between cash holdings and the cost of carry for financially unconstrained firms. We find no evidence of such a relation for financially constrained firms. Our results suggest that financial constraints play an important role in adjusting cash to changes in the cost of carry. We introduce a simple model in which firms differ in their cost function of external finance, where the constrained firms' highly curved cost function drives a steeper cash demand, leading to their lower cash sensitivity to the cost of carry.

Keywords: Cost of holding cash; Financial constraints; Corporate cash holdings; Financially constrained versus unconstrained firms (search for similar items in EconPapers)
JEL-codes: E41 E43 G30 G32 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:74:y:2022:i:c:s0929119922000591

DOI: 10.1016/j.jcorpfin.2022.102216

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