TY - JOUR
T1 - Cost of carry, financial constraints, and dynamics of corporate cash holdings
AU - Eskandari, Ruhollah (Omid)
AU - Zamanian, Morteza
N1 - Funding Information:
We wish to thank Amir Kermani, Martin Schmalz, Roger Gordon, Nicola Gennaioli, David Denis, Vahid Saadi, Paolo Colla, Pooyan Khashabi, Emanuel Moench, Valerie Ramey, and Nicola Pavoni for their very helpful comments and suggestions. We would like to thank all participants at the University of York, Irish Academy of Finance, Royal Economic Society 2018, University of Milan, and Bocconi for their helpful comments.
Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2022/6/1
Y1 - 2022/6/1
N2 - This paper provides new evidence on how the cost of carry is linked to corporate cash policy in the presence of financial frictions. Using both time-series and firm-level data for US public and private manufacturing firms, we find a negative correlation between cash holdings and the cost of carry for financially unconstrained firms. We find no evidence of such a relation for financially constrained firms. Our results suggest that financial constraints play an important role in adjusting cash to changes in the cost of carry. We introduce a simple model in which firms differ in their cost function of external finance, where the constrained firms' highly curved cost function drives a steeper cash demand, leading to their lower cash sensitivity to the cost of carry.
AB - This paper provides new evidence on how the cost of carry is linked to corporate cash policy in the presence of financial frictions. Using both time-series and firm-level data for US public and private manufacturing firms, we find a negative correlation between cash holdings and the cost of carry for financially unconstrained firms. We find no evidence of such a relation for financially constrained firms. Our results suggest that financial constraints play an important role in adjusting cash to changes in the cost of carry. We introduce a simple model in which firms differ in their cost function of external finance, where the constrained firms' highly curved cost function drives a steeper cash demand, leading to their lower cash sensitivity to the cost of carry.
KW - Cost of holding cash
KW - Financial constraints
KW - Corporate cash holdings
KW - Financially constrained versus unconstrained firms
UR - http://www.scopus.com/inward/record.url?scp=85130410198&partnerID=8YFLogxK
U2 - 10.1016/j.jcorpfin.2022.102216
DO - 10.1016/j.jcorpfin.2022.102216
M3 - Article
VL - 74
JO - Journal of Corporate Finance
JF - Journal of Corporate Finance
SN - 0929-1199
M1 - 102216
ER -
