Corporate cash holdings and monetary shocks: A test of the credit channel theory. Issue 2 (19th August 2020)

• Record Type: Journal Article
• Authors: Deng, Yiling; Yao, Haibo
• Is Part Of: Review of financial economics. Volume 39:Issue 2(2021)
• Page Start: 203
• Page End: 222
• Publication Date: 2020-08-19
• Subjects: agency problems -- cash holdings -- financial constraints -- MNCs -- monetary shocks -- recession; Business -- Periodicals; Economics -- Periodicals; Business; Economics; Electronic journals; Periodicals; 332.05
• DOI: 10.1002/rfe.1117
• Languages: English
• ISSNs: 1058-3300

Abstract

Abstract: This paper studies the impact of monetary shocks on corporate cash holdings before the 2008 financial crisis. We find evidence supporting the credit channel theory that industrial firms increase cash holdings when monetary policy is unexpectedly tightened. The impact is more pronounced for financially constrained, high managerial compensation incentives, domestic firms, and during recession. Furthermore, we examine the structural increase in cash holdings in the 2000s, we find that industrial firms continuously increase cash holdings when monetary policy is persistently and unexpectedly tightened, which overweighs the reversal effect of monetary policy.