The Impact of Monetary Policy Shocks On Corporate Cash Holdings

This study examines the impact of monetary policy on corporate cash holdings. Using a sample of U.S. firms over the period 1994-2019, we find that expansionary monetary policy significantly increase the level of cash reserves. However, the impact of contractionary monetary policy on cash holdings is not statistically significant. Our findings remain robust after controlling for potential endogenous effects, using alternative measures of cash holdings, and varying forecasting windows. The effect of monetary policy on cash holdings is more pronounced among firms with greater financial constraints, higher firm risk, weaker corporate governance, and greater stock return sensitivity to MPS. Furthermore, we observe that firms tend to enhance their cash reserves through debt issuance and internal cash flows. Nonetheless, under expansionary monetary conditions, the marginal value of cash decreases, as evidenced by firms’ propensity to spend cash on acquisitions and dividend payments. Overall, our study highlights the important role of monetary policy in shaping corporate cash policy.