Central Banks’ Assessments of Economic Outlook and Corporate Cash Holdings: Evidence of Strategic Motives

In this study, we examine the relationship between the central banks’ assessments of the economic outlook and corporate cash holdings. When a central bank has a relatively optimistic view of the economy, we find that firms tend to increase cash holdings through equity and debt issuances. As a result, they increase capital and R&D expenses that lead to better financial outcomes and innovations. Firms with higher competition and sales growth are more sensitive to central bank information, while financial constraints do not drive the results. Investors’ increased preference for cash further strengthens strategic cash holdings. Overall, the results indicate that there are strategic motives for cash holdings; firms tend to raise cash for an innovation race when the assessments of the future economy are bright.