بینش جدید درباره رابطه بین دارایی های نقدی شرکت و نرخ بهره New insights about the relationship between corporate cash holdings and interest rates

1 Introduction Baumol (1952) and Tobin (1956) claimed that as interest rates fall corporations will hold more cash due to the lower opportunity cost. With interest rates at 40 year lows, it leaves one to wonder if this negative relationship has held over time. The primary contribution of this paper is that it is the first extensive empirical study of the relationship between interest rates and cash holdings in the United States. While theoretical relationships were proposed in the 1950’s, they were not examined empirically. Rather than simply including a measure of interest as a control variable, it is the primary focus of this paper. In addition to empirically testing for the relationship between cash holdings and interest rates, the methodology and variables capturing cash holdings are distinguished from recent papers on corporate cash holdings. The relationship between cash holdings and interest rates is tested using a random effects threshold model, which distinguishes the relationship over different ranges of interest rates. To emphasize why it is necessary to control for varying interest rates, Fig. 1 plots the federal funds rate from January 1970 until December 2014. During the 1970’s, rates varied from 4.43 to 11.19 %. This is the only time during the sample where we see a uniform increase in rates. Rates reached a peak at 16.38 % in 1981 but subsequently declined to levels seen during the 1970’s. In the 1990’s, rates continued to decline, but at a slower pace than was experienced during the 1980’s. Finally, during the 2000’s and the most recent decade, rates have continued to decline even further to 0.09 % leaving interest rates at the lowest levels experienced over the last 40 years. Because of the variation in rates, the data are divided into interest rate ranges that are found by searching for thresholds in the interest rate series. This allows us to see if the negative relationship holds in the face of the dramatic fluctuation that interest rates experienced during these times.