 Accounting for the corporate cash increaseEuropean Economic Review, 2020, vol. 123, issue C Abstract: Why do U.S. firms hold much more cash now than they did 40 years ago? I construct a partial equilibrium model of firm dynamics where cash provides a buffer against persistent and transitory cash flow shocks in the presence of costly external finance. I find that 57% of the increase in cash holdings of small public firms can be accounted for by the observed decrease in the correlation between revenue and operating expenses. The decrease in the correlation between revenue and expenses is then decomposed and explained. The model has a corresponding correlation parameter between the shocks on revenue and expenses and allows for the possibility of negative cash flows. Negative cash flows are frequently observed in the data and the frequency has a significant impact on optimal cash holdings. Finally, a lower corporate tax rate and cash restrictions are imposed on the model as policy experiments. Keywords: Cash increase; Revenue-expense correlation decrease; Transitory shocks; Negative cash flows; Precautionary savings (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:123:y:2020:i:c:s0014292120300258 DOI: 10.1016/j.euroecorev.2020.103393 Access Statistics for this article European Economic Review is currently edited by T.S. Eicher, A. Imrohoroglu, E. Leeper, J. Oechssler and M. Pesendorfer More articles in European Economic Review from Elsevier |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.