The heterogeneous impact of European Central Bank asset price surprises on corporate liquidity demand

Theories of corporate liquidity demand build on the notion that firms accumulate cash to safeguard their activities in the face of costly external finance. Monetary policy provides a clear source of exogenous variation in the external finance premium. Using high-frequency-identified asset price surprises, I estimate the impact of European Central Bank monetary policy shocks on euro area corporate cash holdings over 2001–2019. Old firms with large fixed assets react forcefully to expansionary shocks that result in higher asset prices by reducing demand for precautionary liquidity, and access borrowing to finance tangible investment in a second period. This is because these firms are more exposed to valuation effects and can use more debt when accommodating monetary policy is transmitted through the revaluation of assets or, relatedly, when the collateral constraints that they face are predominantly asset-based, which appears to be the case for the euro area.