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New insights about the relationship between corporate cash holdings and interest rates

Author

Listed:
  • Anna-Leigh Stone

    (Samford University)

  • Benton E. Gup

    (University of Alabama)

  • Junsoo Lee

    (University of Alabama)

Abstract

Between 1970 and 2014 the federal funds rate soared from approximately 7.18 % to 16.38 %, and subsequently declined to 0.09 %. Based on economic theory, corporate cash holdings should have moved inversely with these interest rate swings. Using a new measure of cash holdings and a random effects threshold model, we examine this relationship over the past four and a half decades and show that the expected negative relationship does not exist. Furthermore, some established motives for cash holdings do not explain these results. Using a quantile regression, we show that a positive relationship between cash holdings and interest rates exists among all quantiles of cash holdings. All of these results imply that there is not one particular group of firms that is driving the positive relationship and a revised theory of the relationship between interest rates and cash holdings may be warranted.

Suggested Citation

  • Anna-Leigh Stone & Benton E. Gup & Junsoo Lee, 2018. "New insights about the relationship between corporate cash holdings and interest rates," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(1), pages 33-65, January.
    • Handle: RePEc:spr:jecfin:v:42:y:2018:i:1:d:10.1007_s12197-016-9372-8
    DOI: 10.1007/s12197-016-9372-8
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    Cited by:

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    2. Hossain, Mohammed Sawkat, 2021. "A revisit of capital structure puzzle: Global evidence and analysis," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 657-678.
    3. Ysmailov, Bektemir, 2021. "Interest rates, cash and short-term investments," Journal of Banking & Finance, Elsevier, vol. 132(C).
    4. Gonenc, Halit & Polten, Marc-Oliver & Westerman, Wim, 2022. "U.S., Anglo-Saxon European, and non-Anglo-Saxon European cash holdings around the financial crisis," Global Finance Journal, Elsevier, vol. 52(C).
    5. Eskandari, Ruhollah & Zamanian, Morteza, 2022. "Cost of carry, financial constraints, and dynamics of corporate cash holdings," Journal of Corporate Finance, Elsevier, vol. 74(C).
    6. Pankaj Agrrawal, 2023. "The Gibbons, Ross, and Shanken Test for Portfolio Efficiency: A Note Based on Its Trigonometric Properties," Mathematics, MDPI, vol. 11(9), pages 1-19, May.

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    More about this item

    Keywords

    Cash; Cash holdings; Interest rates; Federal funds rate;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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