Cost of carry, financial constraints, and dynamics of corporate cash holdings

Ruhollah (Omid) Eskandari; Morteza Zamanian

doi:10.1016/j.jcorpfin.2022.102216

Cost of carry, financial constraints, and dynamics of corporate cash holdings

Ruhollah (Omid) Eskandari, Morteza Zamanian

Amirkabir University of Technology

Research output: Contribution to journal › Article › peer-review

17 Citations (Scopus)

Abstract

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.

Original language	English
Article number	102216
Number of pages	29
Journal	Journal of Corporate Finance
Volume	74
Early online date	20 May 2022
DOIs	https://doi.org/10.1016/j.jcorpfin.2022.102216
Publication status	Published - 1 Jun 2022

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This output contributes to the following UN Sustainable Development Goals (SDGs)

SDG 9 Industry, Innovation, and Infrastructure

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10.1016/j.jcorpfin.2022.102216Licence: CC BY

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title = "Cost of carry, financial constraints, and dynamics of corporate cash holdings",

abstract = "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.",

keywords = "Cost of holding cash, Financial constraints, Corporate cash holdings, Financially constrained versus unconstrained firms",

author = "Eskandari, \{Ruhollah (Omid)\} and Morteza Zamanian",

note = "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: {\textcopyright} 2022 Elsevier B.V.",

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doi = "10.1016/j.jcorpfin.2022.102216",

language = "English",

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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 - https://www.scopus.com/pages/publications/85130410198

U2 - 10.1016/j.jcorpfin.2022.102216

DO - 10.1016/j.jcorpfin.2022.102216

M3 - Article

SN - 0929-1199

VL - 74

JO - Journal of Corporate Finance

JF - Journal of Corporate Finance

M1 - 102216

ER -

Cost of carry, financial constraints, and dynamics of corporate cash holdings

Abstract

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