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Inflation and the evolution of firm-level liquid assets

Author

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  • Curtis, Chadwick C.
  • Garín, Julio
  • Saif Mehkari, M.

Abstract

This paper shows that inflation has been an important determinant of firm-level liquid asset holdings. Liquid assets as a share of total assets – the cash ratio – for U.S. corporations steadily declined from the 1960s to the early 1980s, and has since steadily increased. Our empirical analysis finds that inflation is a key factor accounting for these changes. We show that these liquid asset holdings are imperfectly hedged against inflation. Hence, changes in inflation alter the real value of a firm’s liquid asset portfolio causing them to readjust these balances.

Suggested Citation

  • Curtis, Chadwick C. & Garín, Julio & Saif Mehkari, M., 2017. "Inflation and the evolution of firm-level liquid assets," Journal of Banking & Finance, Elsevier, vol. 81(C), pages 24-35.
    • Handle: RePEc:eee:jbfina:v:81:y:2017:i:c:p:24-35
    DOI: 10.1016/j.jbankfin.2017.04.008
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    References listed on IDEAS

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    Cited by:

    1. Macnamara, Patrick, 2019. "Taxes and financial frictions: Implications for corporate capital structure," Journal of Economic Dynamics and Control, Elsevier, vol. 101(C), pages 82-100.
    2. Begenau, Juliane & Palazzo, Berardino, 2021. "Firm selection and corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 139(3), pages 697-718.
    3. Cogoljević, Dušan & Gavrilović, Milan & Roganović, Miloš & Matić, Ivana & Piljan, Ivan, 2018. "Analyzing of consumer price index influence on inflation by multiple linear regression," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 505(C), pages 941-944.
    4. Ysmailov, Bektemir, 2021. "Interest rates, cash and short-term investments," Journal of Banking & Finance, Elsevier, vol. 132(C).
    5. Kumar, Saten, 2020. "Firms’ asset holdings and inflation expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 193-205.
    6. Eskandari, Ruhollah & Zamanian, Morteza, 2022. "Cost of carry, financial constraints, and dynamics of corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 74(C).
    7. John R. Graham & Mark T. Leary, 2017. "The Evolution of Corporate Cash," NBER Working Papers 23767, National Bureau of Economic Research, Inc.
    8. Brianti, Marco, 2021. "Financial Shocks, Uncertainty Shocks, and Monetary Policy Trade-Offs," Working Papers 2021-5, University of Alberta, Department of Economics.
    9. John R Graham & Mark T Leary, 2018. "The Evolution of Corporate Cash," Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4288-4344.
    10. Silva Manoel, Aviner Augusto & Moraes, Marcelo Botelho da Costa & Lopes Santos, David Ferreira & Fava Never, Marcos, 2018. "Determinants of corporate cash holdings in times of crisis: insights from Brazilian sugarcane industry private firms," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association, vol. 21(2), March.

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    More about this item

    Keywords

    Cash holding; Inflation; Liquidity; Liquid assets; Cash ratio;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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