Inflation and the evolution of firm-level liquid assets

This paper shows that inflation has been an important determinant of firm-level liquid asset holdings. Liquid assets as a share of total assets - the cash ratio - for U.S. corporations steadily declined from the 1960s to the early 1980s, and has since steadily increased. Our empirical analysis finds that inflation is a key factor accounting for these changes. We show that these liquid asset holdings are imperfectly hedged against inflation. Hence, changes in inflation alter the real value of a firm's liquid asset portfolio causing them to readjust these balances.