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Corporate Liquidity

Paper Session

Sunday, Jan. 7, 2018 10:15 AM - 12:15 PM

Loews Philadelphia, Commonwealth Hall C
Hosted By: American Finance Association
  • Chair: Michael Roberts, University of Pennsylvania

The Interest Sensitivity of Corporate Cash

Xiaodan Gao
National University of Singapore
Toni Whited
University of Michigan
Na Zhang
Fudan University


We document a hump-shaped relationship between interest rates and corporate cash demand that contradicts conventional wisdom, and we develop a theoretical framework to rationalize this finding. The model features external-financing costs that are endogenously determined by interest rates. Interest rates affect corporate cash demand through two channels. First, forgone interest earnings imply an intuitive negative relation. Second, a positive relation emerges when firms dress their balance sheets with cash to obtain better borrowing rates. The first mechanism is stronger at high interest rates, and the second is stronger at low interest rates. The estimated model quantitatively matches data features and reproduces the hump-shaped cash-interest relationship. This nonmonotonic corporate money demand schedule has important implications for monetary policy.

Firm Selection and Corporate Cash Holdings

Juliane Begenau
Harvard Business School
Berardino Palazzo
Boston University


Among stock market entrants, more firms over time are R&D–intensive with initially lower profitability but higher growth potential. This sample-selection effect determines the secular trend in U.S. public firms’ cash holdings. A stylized firm industry model allows us to analyze two competing changes to the selection mechanism: a change in industry composition and a shift toward less profitable R&D–firms. The latter is key to generating higher cash ratios at IPO, necessary for the secular increase, whereas the former mechanism amplifies this effect. The data confirm the prominent role played by selection, and corroborate the model’s predictions.

Funding Liquidity Without Banks: Evidence From a Shock to the Cost of Very Short-term Debt

Felipe Restrepo
Western University
Philip Strahan
Boston College
Lina Cardona
Bank of the Republic


In 2011, Colombia instituted a tax on repayment of bank loans, thereby increasing the cost of short-term bank credit more than long-term credit. Firms responded by cutting their short-term loans for liquidity management purposes and increasing their use of cash and trade credit. In industries where trade credit is more accessible (based on U.S. Compustat firms), we find substitution into accounts payable and little effect on cash and investment. Where trade credit is less available, firms increase cash and cut investment. Thus, trade credit offers a substitute source of liquidity that can insulate some firms from bank liquidity shocks.
Joao Gomes
University of Pennsylvania
Sheridan Titman
University of Texas-Austin
Mitchell Petersen
Northwestern University
JEL Classifications
  • G3 - Corporate Finance and Governance