Abstract
This paper provides new evidence on the link between financial constraints and corporate cash policy. Using time-series data for US public and private manufacturing firms, we find negative correlation between cash holdings and cost-of-carry for large firms. We find no evidence of such a relation for small firms. We also perform a firm-level analysis supporting our time-series results that unconstrained firms have a propensity to adjust cash when cost-of-carry changes, whereas constrained firms do not exhibit this propensity. We provide a basic model predicting changes in the cost-of-carry drive variations in optimal cash holdings, considerably more for financially unconstrained firms.
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