Influence of volatility on corporate cash holdings among US banks.

Abstract

Cash represent a large and growing portion of corporate assets, with the average cash-to-asset ratio doubling from the 1980s to 2000s. Furthermore, the recent Global Financial Crisis was characterized by illiquidity. In this paper, we investigate how industry-specific and broad-based market volatility impacts the level of corporate cash holdings for US banks. Several measures of cash holding ratios were used and our findings show that for every 0.1 increases in market volatility based off our volatility measure on S&P500 Financial Services Index, banks will hold an additional cash amount equals to approximately 8.13% of its market value. This is consistent with our hypothesis that a higher level of market volatility presents corporations the incentive to hold more cash to guard against sudden market shocks. However, upon extending our study, we illustrated that the trend is only visible in Money Centre Banks and Regional Banks. We believe that Savings Bank’s cash positions is unaffected by market volatility may be due to the domestic nature of these banks, which led them to be less affected by the turmoil in the global financial markets. All in all, the findings presented in this paper provide direct evidence of how volatility can impact the level of cash holdings in banks and insights into the importance of volatility in determining corporate cash policy in US banks.