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Session Overview
CFGT-3: Corporate Cash Policy
Thursday, 24/Aug/2017:
3:30pm - 5:00pm

Session Chair: Boris Nikolov, University of Lausanne, Swiss Finance Institute
Location: O129

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The Interest Sensitivity of Corporate Cash

Xiaodan Gao1, Toni M. Whited2, Na Zhang3

1National University of Singapore; 2University of Michigan, NBER; 3Fudan University

Discussant: Berardino Palazzo (Boston 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, saved external borrowing costs imply a positive relation. The calibrated model quantitatively matches data features and reproduces the hump-shaped cash-interest relationship. The derived corporate money demand schedule has important implications for monetary policy.

EFA2017-1424-CFGT-3-Gao-The Interest Sensitivity of Corporate Cash.pdf

Transitory Versus Permanent Shocks: Explaining Corporate Savings and Investment

Sebastian Gryglewicz1, Loriano Mancini2, Erwan Morellec3, Enrique Schroth4, Philip Valta5

1Erasmus University Rotterdam; 2USI, Swiss Finance Insitute; 3EPFL, Swiss Finance Institute, CEPR; 4Cass Business School, CEPR; 5University of Bern, University of Geneva, Swiss Finance Institute

Discussant: Andras Danis (Georgia Tech)

We model the investment and cash holdings decisions of a firm facing financing frictions and subject to permanent and transitory cash flow shocks. While cash holdings increase and investment decreases with the volatilities of either type of shocks, a higher correlation between these shocks makes the firm hold less cash and invest more. We verify these predictions using a sample of publicly traded U.S. firms from 1975 to 2014 and estimates of the permanent and transitory cash flow shocks obtained via structural estimation. Our analysis demonstrates that corporate policies are better understood when recognizing the separate effects of permanent and transitory shocks on cash flow risk.

EFA2017-498-CFGT-3-Gryglewicz-Transitory Versus Permanent Shocks.pdf

R&D Dynamics and Corporate Cash

Xiaodan Gao1, Jake Zhao2

1National University of Singapore; 2Peking University

Discussant: Vladimir Vladimirov (University of Amsterdam)

Innovative firms hold substantial cash reserves. Potential explanations in the literature for this phenomenon include R&D adjustment costs, financial frictions, knowledge spillover, innovation uncertainty, and market competition. We build a parsimonious industry equilibrium model of firms that incorporates all of the cited explanations and determines which factors are critical for understanding innovative firms' cash choices. We find that adjustment costs play a relatively small role with cash, while financial frictions, knowledge spillover, and market competition matter, but only on the extensive margin. Innovation uncertainty has the largest effects, and matters on both the extensive and intensive margins.

EFA2017-936-CFGT-3-Gao-R&D Dynamics and Corporate Cash.pdf

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