Review of Financial Studies Vol. 34 No. 4 2021
Corporate Money Demand
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.
- DOI
- 10.1093/rfs/hhaa083
- Volume
- 34
- Issue
- 4
- Pages
- 1834-1866
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref