 Interest rates, cash and short-term investmentsJournal of Banking & Finance, 2021, vol. 132, issue C Abstract: This paper addresses the recent mixed evidence on the relationship between interest rates and corporate liquidity. I find that high (low) interest rates are associated with high (low) short-term investments and low (high) cash due to the opportunity cost of holding the latter. Further, I show that interest rates are negatively related to total liquid assets, i.e., the sum of cash and short-term investments. These patterns suggest a two-level demand for liquidity. At the top level, there is demand for overall liquidity and an increase in interest rates increases its price resulting in a negative effect. At the bottom level, once the firm has decided its overall level of liquidity, it chooses what fraction to hold in cash versus short-term investments. An increase in interest rates increases the price of cash relative to short-term investments resulting in a decrease in the former and an increase in the latter. Keywords: Corporate cash; Interest rates; Transactions model; Short-term investments; Marketable securities (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:jbfina:v:132:y:2021:i:c:s0378426621001849 DOI: 10.1016/j.jbankfin.2021.106225 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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