"Firms choose their optimal cash holding in response to existing market challenges. These currently include 1) an uncertain economic environment following the financial crisis, 2) an uncertain fiscal environment, including ongoing debates about the corporate tax structure and the federal government budget, and 3) an uncertain monetary environment, including challenges to the sustainability of historically low interest rates as the Federal Reserve discontinues its quantitative easing policies," Hodrick wrote.
"If the economy continues to recover and uncertainty about future growth rates and fiscal and monetary policies declines, the option value of holding cash will decline. If heightened uncertainty continues, however, these firms will continue to hold high cash levels."
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