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How much is corporate cash-pooling worth? Modelling and simulation

Edina Berlinger (), Zsolt Bihary () and Gyorgy Walter

Corvinus Economics Working Papers (CEWP) from Corvinus University of Budapest

Abstract: The paper analyzes a special corporate banking product, the so called cash-pool, which gained remarkable popularity in the recent years as firms try to centralize and manage their liquidity more efficiently. The novelty of this paper is the formalization of a valuation model which can serve as a basis for a Monte Carlo simulation to assess the most important benefits of the firms arising from the pooling of their cash holdings. The literature emphasizes several benefits of cash-pooling such as interest rate savings, economy of scale and reduced cash-flow volatility. The presented model focuses on the interest rate savings complemented with a new aspect: the reduced counterparty risk toward the bank. The main conclusion of the analysis is that the value of a cash-pool is higher in case of firms with large, diverse and volatile cash-flows having less access to the capital markets especially if the partner bank is risky and offers a high interest spread. It is also shown that cash-pooling is not the privilege of large multinational firms any more as the initial direct costs can be easily regained within a year even in the case of SMEs.

Keywords: corporate cash management; banking transaction services; cash-pool; Monte-Carlo simulation; net interest spread; counterparty risk (search for similar items in EconPapers)
JEL-codes: G15 G21 G32 (search for similar items in EconPapers)
Date: 2016-01-20
New Economics Papers: this item is included in nep-cmp
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