Corporate Money Demand

Financial innovation and the transactions demand for cash

Xiaodan Gao, Toni Whited and Na Zhang

The Review of Financial Studies, 2021, vol. 34, issue 4, 1834-1866

Abstract: 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 to be behind the recent rise in corporate cash.

JEL-codes: E41 E43 G12 G32 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (10)

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