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

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...

Full description

Saved in:
Bibliographic Details
Published in:The Review of financial studies 2016-08, Vol.29 (8), p.2194-2240
Main Authors: Azar, José A., Kagy, Jean-François, Schmalz, Martin C.
Format: Article
Language:English
Subjects:
Business entities
Business holdings
Capital costs
Carrying costs
Cash
Cash flow
Cost estimates
Cost of capital
Interest rates
Liquid assets
Return on investment
Studies
Time series
United States
United States Treasury bills
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhw021