Abstract:
This dissertation is composed of three essays that investigate three external determinants of corporate cash holdings: interest rates, business cycles, and unlimited FDIC insurance guarantees. In the first essay, theories of the relationship between interest rates and cash holdings are empirically tested. Based on economic theory, corporate cash holdings should have moved inversely with these interest rate swings. Using two measures of cash holdings and a random effects threshold model, we examine this relationship over the past four decades and show that the expected negative relationship does not exist. Furthermore, the established motives for cash holdings do not explain these results. Using a quantile regression, we show that a positive relationship between cash holdings and interest rates primarily exists among firms in lower quantiles of cash holdings demonstrating that firms with below average amounts of cash holdings are driving the results. In the second essay, the relationship between cash holdings and business cycles is examined between 1976 and 2012, with a primary emphasis on how cash holdings vary during recessions. Findings confirm that cash holdings do vary over the business cycle. Upon further examination, corporate cash holdings initially decline during recessions but increase to levels at or above pre-crisis levels. In addition, cash holdings appear to increase around the National Bureau of Economic Research's announcements of recessions. Therefore, we do not find evidence of the precautionary motive for cash holdings during recessions but we do find evidence of an announcement effect for cash holdings. The third essay examines the unlimited FDIC insurance provisions on noninterest-bearing transaction accounts provided by the Transaction Account Guarantee Program and Section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The paper documents an increase in the funds held in the accounts. Because corporations are known to hold the majority of these accounts, attention is paid to the potential increase in corporate cash holdings. Using both time series and panel data techniques, I document an increase in corporate cash holdings during this time however, the increase is primarily explained by the uncertainty surrounding the ongoing recession.
