We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
THE IMPACT OF COMPENSATING BALANCE REQUIREMENTS ON THE CASH BALANCES OF MANUFACTURING CORPORATIONS: AN EMPIRICAL STUDY.
- Authors
CAMPBELL, TIM; BRENDSEL, LELAND
- Abstract
The arguments presented by Sprenkle and Orr may be summarized as follows. Sprenkle argues (p. 847), "it is clear that most cash balances are held for other than transactions purposes; they are, in fact, held to pay for their bank services." Sprenkle is led to this conclusion by the utter failure of the Baumol-Tobin transactions demand model to predict actual cash holdings of the firms in his sample (a cross section of 475 of the largest 500 industrial firms). Orr offers a two-point response to Sprenkle's argument. First, he shows that with improved specification (the Miller-Orr model rather than the Baumol-Tobin model) and with improved data (daily cash flows for three large industrial firms) predictive power of the transactions demand model improves significantly. Second, he argues that the available evidence is inconclusive as to the impact of compensating balance requirements on corporate money demand. The essence of the disagreement between Sprenkle and Orr concerns whether any transactions demand model has predictive power which may be considered minimally acceptable. If no such model has adequate power then something else must be determining the level of corporate cash balances. Sprenkle's candidate is compensating balances. However, neither author provides an explicit test of any kind as to whether compensating balances are a binding constraint on firms, and as Orr noted (see page 1569, note 7) no explicit empirical treatment of compensating balances has appeared in the literature in recent years. Given the conflicting results presented by Sprenkle and Orr, which resulted at least in part from different levels of aggregation and time intervals, it seems natural to ask whether the requirement for compensating balances has caused us to misinterpret the results of studies using data that is highly aggregated and infrequently reported. The purpose of this paper is, therefore, to investigate the impact of compensating balances on the cash holdings of man...
- Subjects
COMPENSATORY balances; CASH management; CORPORATE finance; DEMAND for money; CASH budgets; MANUFACTURING industries
- Publication
Journal of Finance (Wiley-Blackwell), 1977, Vol 32, Issue 1, p31
- ISSN
0022-1082
- Publication type
Article
- DOI
10.2307/2326900