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Can Changes in the Cost of Carry Explain the Dynamics of Corporate “Cash” Holdings?

José Azar1; Jean-François Kagy2; Martin C. Schmalz3,4

1 Charles River Associates · 2 Google (United States) · 3 University of Michigan–Ann Arbor · 4 Ross School

Review of Financial Studies 2016

Firms until recently were effectively constrained to hold liquid assets in non-interest-bearing accounts. As a result, the cost of capital of firms’ liquid-assets portfolios exceeded the return, especially when the risk-free interest rate was high. The spread between cost and return is the cost of carry. Changes in the cost of carry explain the dynamics of corporate “cash” holdings both in the United States and abroad, and the level of cost of carry explains the level of liquid-asset holdings across countries. We conclude that current US corporate cash holdings are not abnormal in a historical or international comparison. Received February 17, 2015; accepted October 1, 2015 by Editor David Denis.

DOI
10.1093/rfs/hhw021
Volume
29 (8)
Pages
2194-2240
Language
en
Export
BibTeX
Sources
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