diff --git a/NEWS b/NEWS
index 51b7e38..4eae54d 100644
--- a/NEWS
+++ b/NEWS
@@ -98,12 +98,7 @@ News file for Stow.
       consistency.
 
     - INSTALL.md now also documents how to build directly from git.
-** Fixes for bugs and technical debt
-*** Fix for test suite on Cygwin
-
-    Thanks to Lucas Theisen for this fix!
-
-*** aclocal.m4 was updated using aclocal 1.15.1.
+** Fixes for bugs, tests, and other technical debt
 
 *** Add Docker files for convenient testing across multiple Perl versions
 
@@ -118,17 +113,28 @@ News file for Stow.
 
     Thanks to Charles LeDoux for this!
 
-*** Add Coveralls integration with GitHub
-
-    This means that test coverage analysis will be automatically be run
-    on any pull requests submitted to GitHub.
-
 *** Set up continuous testing via Travis CI
 
     This means that the test suite will be automatically run on any
     pull requests submitted to GitHub, as well as "make distcheck"
     and "./Build distcheck".
 
+*** Add Coveralls integration with GitHub
+
+    This means that test coverage analysis will be automatically be run
+    on any pull requests submitted to GitHub.
+
+*** Miscellaneous improvements to the test suite
+
+    These include proper testing of the distinct impact of ~/.stowrc
+    and .stowrc in the directory from which Stow is invoked.
+
+*** Fix for test suite on Cygwin
+
+    Thanks to Lucas Theisen for this fix!
+
+*** aclocal.m4 was updated using aclocal 1.15.1.
+
 *** Miscellaneous fixes to the build and distribution process
 
 *** Improve handling of directories with unusual names
diff --git a/bin/stow.in b/bin/stow.in
index e33a4a6..1699bc0 100755
--- a/bin/stow.in
+++ b/bin/stow.in
@@ -515,14 +515,14 @@ sub main {
 #============================================================================
 sub process_options {
     # Get cli options.
-    my ($cli_options, 
-        $pkgs_to_unstow, 
+    my ($cli_options,
+        $pkgs_to_unstow,
         $pkgs_to_stow) = parse_options(@ARGV);
 
     # Get the .stowrc options.
     # Note that rc_pkgs_to_unstow and rc_pkgs_to_stow are ignored.
-    my ($rc_options, 
-        $rc_pkgs_to_unstow, 
+    my ($rc_options,
+        $rc_pkgs_to_unstow,
         $rc_pkgs_to_stow) = get_config_file_options();
 
     # Merge .stowrc and command line options.
@@ -547,8 +547,8 @@ sub process_options {
 #             Example: parse_options(@ARGV)
 # Returns   : (\%options, \@pkgs_to_unstow, \@pkgs_to_stow)
 # Throws    : a fatal error if a bad command line option is given
-# Comments  : Used for parsing both command line options and rc file. Used 
-#             for parsing only. Sanity checks and post-processing belong in 
+# Comments  : Used for parsing both command line options and rc file. Used
+#             for parsing only. Sanity checks and post-processing belong in
 #             process_options().
 #============================================================================
 sub parse_options {
@@ -614,6 +614,7 @@ sub parse_options {
 
     return (\%options, \@pkgs_to_unstow, \@pkgs_to_stow);
 }
+
 sub sanitize_path_options {
     my ($options) = @_;
 
diff --git a/t/rc_options.t b/t/rc_options.t
index 419f8c3..593ff11 100755
--- a/t/rc_options.t
+++ b/t/rc_options.t
@@ -22,67 +22,144 @@
 use strict;
 use warnings;
 
-use Test::More tests => 23;
+use Test::More tests => 33;
 
 use testutil;
 
 require 'stow';
 
-# stowrc file used for testing.
-my $RC_FILE = "$TEST_DIR/.stowrc";
+# .stowrc files used for testing, relative to run_from/
+my $CWD_RC_FILE = ".stowrc";
+my $HOME_RC_FILE = "../.stowrc";
 # Take the safe route and cowardly refuse to continue if there's
-# already a file at $RC_FILE.
-if (-e $RC_FILE) {
-    die "RC file location $RC_FILE already exists!\n";
+# already a file at $HOME_RC_FILE.
+if (-e $HOME_RC_FILE) {
+    die "RC file location $HOME_RC_FILE already exists!\n";
 }
 
-# Define the variable that will be used to write stowrc.
-my $rc_contents;
+my ($options, $pkgs_to_delete, $pkgs_to_stow);
 
 # Init testing directory structure and overwrite ENV{HOME} to prevent
-# squashing existing stowrc file.
+# squashing existing .stowrc file.
 init_test_dirs();
 
 # =========== RC Loading Tests ===========
 # Basic parsing and loading rc file tests.
 # ========================================
 
+my $orig_HOME = $ENV{HOME};
+
 #
-# Test stowrc file with one options per line.
+# Test no .stowrc file anywhere
+#
+delete $ENV{HOME};
+local @ARGV = ('dummy');
+cd("$TEST_DIR/run_from");
+($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
+is($options->{target},  "$ABS_TEST_DIR", "default --target with no .stowrc");
+is($options->{dir}, "$ABS_TEST_DIR/run_from", "default -d with no .stowrc");
+
+#
+# Test .stowrc file in cwd with relative paths, and $HOME not defined
+#
+make_file($CWD_RC_FILE, <<HERE);
+    -d ../stow
+    --target ../target
+HERE
+($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
+is($options->{target},  "../target"
+   => "relative --target from \$PWD/.stowrc");
+is($options->{dir}, "../stow"
+   => "relative -d from \$PWD/.stowrc");
+
+$ENV{HOME} = $orig_HOME;
+remove_file($CWD_RC_FILE);
+
+#
+# Test .stowrc file in cwd with absolute paths, and $HOME not defined
+#
+make_file($CWD_RC_FILE, <<HERE);
+    -d $ABS_TEST_DIR/stow
+    --target $ABS_TEST_DIR/target
+HERE
+($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
+is($options->{target},  "$ABS_TEST_DIR/target"
+   => "absolute --target from \$PWD/.stowrc");
+is($options->{dir}, "$ABS_TEST_DIR/stow"
+   => "abs_test_dir -d from \$PWD/.stowrc");
+
+$ENV{HOME} = $orig_HOME;
+remove_file($CWD_RC_FILE);
+
+#
+# Test ~/.stowrc file with one relative option per line.
 #
 local @ARGV = ('dummy');
-$rc_contents = <<HERE;
-    -d $TEST_DIR/stow
-    --target $TEST_DIR/target
+make_file($HOME_RC_FILE, <<HERE);
+    -d ../stow
+    --target ../target
 HERE
-make_file($RC_FILE, $rc_contents);
-my ($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
-is($options->{target},  "$TEST_DIR/target", "rc options different lines");
-is($options->{dir}, "$TEST_DIR/stow", "rc options different lines");
+
+($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
+is($options->{target},  "../target", "--target from \$HOME/.stowrc");
+is($options->{dir}, "../stow", "-d from \$HOME/.stowrc");
 
 #
-# Test that scalar cli option overwrites conflicting stowrc option.
+# Test ~/.stowrc file with one absolute option per line.
 #
-local @ARGV = ('-d', "$TEST_DIR/stow",'dummy');
-$rc_contents = <<HERE;
+local @ARGV = ('dummy');
+make_file($HOME_RC_FILE, <<HERE);
+    -d $ABS_TEST_DIR/stow
+    --target $ABS_TEST_DIR/target
+HERE
+
+($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
+is($options->{target},  "$ABS_TEST_DIR/target"
+   => "--target from \$HOME/.stowrc");
+is($options->{dir}, "$ABS_TEST_DIR/stow"
+   => "-d from \$HOME/.stowrc");
+
+#
+# Test ~/.stowrc file is overridden by .stowrc in cwd.
+#
+local @ARGV = ('dummy');
+make_file($HOME_RC_FILE, <<HERE);
+    -d $ABS_TEST_DIR/stow-will-be-overridden
+    --target $ABS_TEST_DIR/target-will-be-overridden
+HERE
+make_file($CWD_RC_FILE, <<HERE);
+    -d $ABS_TEST_DIR/stow
+    --target $ABS_TEST_DIR/target
+HERE
+
+($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
+is($options->{target},  "$ABS_TEST_DIR/target"
+   => "--target overridden by \$PWD/.stowrc");
+is($options->{dir}, "$ABS_TEST_DIR/stow"
+   => "-d overridden \$PWD/.stowrc");
+unlink($CWD_RC_FILE) or die "Failed to unlink $CWD_RC_FILE";
+
+#
+# Test that scalar cli option overwrites conflicting ~/.stowrc option.
+#
+local @ARGV = ('-d', "$ABS_TEST_DIR/stow", 'dummy');
+make_file($HOME_RC_FILE, <<HERE);
     -d bad/path
 HERE
-make_file($RC_FILE, $rc_contents);
 ($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
-is($options->{dir}, "$TEST_DIR/stow", "cli overwrite scalar rc option.");
+is($options->{dir}, "$ABS_TEST_DIR/stow", "cli overwrite scalar rc option.");
 
 #
-# Test that list cli option merges with conflicting stowrc option.
-# Documentation states that stowrc options are prepended to cli options.
+# Test that list cli option merges with conflicting .stowrc option.
+# Documentation states that .stowrc options are prepended to cli options.
 #
 local @ARGV = (
     '--defer=man',
     'dummy'
 );
-$rc_contents = <<HERE;
+make_file($HOME_RC_FILE, <<HERE);
     --defer=info
 HERE
-make_file($RC_FILE, $rc_contents);
 ($options, $pkgs_to_delete, $pkgs_to_stow) = process_options();
 is_deeply($options->{defer}, [qr(\Ainfo), qr(\Aman)],
           'defer man and info');
@@ -98,8 +175,8 @@ is_deeply($options->{defer}, [qr(\Ainfo), qr(\Aman)],
 # Test environment variable expansion function.
 #
 # Basic expansion
-is(expand_environment('$HOME/stow'), "$TEST_DIR/stow", 'expand $HOME');
-is(expand_environment('${HOME}/stow'), "$TEST_DIR/stow", 'expand ${HOME}');
+is(expand_environment('$HOME/stow'), "$ABS_TEST_DIR/stow", 'expand $HOME');
+is(expand_environment('${HOME}/stow'), "$ABS_TEST_DIR/stow", 'expand ${HOME}');
 
 delete $ENV{UNDEFINED}; # just in case
 foreach my $var ('$UNDEFINED', '${UNDEFINED}') {
@@ -135,19 +212,18 @@ is(expand_tilde('\~/path'), '~/path', 'escaped tilde');
 #
 # Test that environment variable expansion is applied.
 #
-$rc_contents = <<'HERE';
+make_file($HOME_RC_FILE, <<'HERE');
 --dir=$HOME/stow
 --target=$HOME/stow
 --ignore=\$HOME
 --defer=\$HOME
 --override=\$HOME
 HERE
-make_file($RC_FILE, $rc_contents);
 ($options, $pkgs_to_delete, $pkgs_to_stow) = get_config_file_options();
-is($options->{dir}, "$TEST_DIR/stow",
-    "apply environment expansion on stowrc --dir");
-is($options->{target}, "$TEST_DIR/stow",
-    "apply environment expansion on stowrc --target");
+is($options->{dir}, "$ABS_TEST_DIR/stow",
+    "apply environment expansion on \$HOME/.stowrc --dir");
+is($options->{target}, "$ABS_TEST_DIR/stow",
+    "apply environment expansion on \$HOME/.stowrc --target");
 is_deeply($options->{ignore}, [qr(\$HOME\z)],
     "environment expansion not applied on --ignore");
 is_deeply($options->{defer}, [qr(\A\$HOME)],
@@ -158,28 +234,28 @@ is_deeply($options->{override}, [qr(\A\$HOME)],
 #
 # Test that tilde expansion is applied in correct places.
 #
-$rc_contents = <<'HERE';
+make_file($HOME_RC_FILE, <<'HERE');
 --dir=~/stow
 --target=~/stow
 --ignore=~/stow
 --defer=~/stow
 --override=~/stow
 HERE
-make_file($RC_FILE, $rc_contents);
 ($options, $pkgs_to_delete, $pkgs_to_stow) = get_config_file_options();
-is($options->{dir}, "$TEST_DIR/stow",
-    "apply environment expansion on stowrc --dir");
-is($options->{target}, "$TEST_DIR/stow",
-    "apply environment expansion on stowrc --target");
+is($options->{dir}, "$ABS_TEST_DIR/stow",
+    "apply tilde expansion on \$HOME/.stowrc --dir");
+is($options->{target}, "$ABS_TEST_DIR/stow",
+    "apply tilde expansion on \$HOME/.stowrc --target");
 is_deeply($options->{ignore}, [qr(~/stow\z)],
-    "environment expansion not applied on --ignore");
+    "tilde expansion not applied on --ignore");
 is_deeply($options->{defer}, [qr(\A~/stow)],
-    "environment expansion not applied on --defer");
+    "tilde expansion not applied on --defer");
 is_deeply($options->{override}, [qr(\A~/stow)],
-    "environment expansion not applied on --override");
+    "tilde expansion not applied on --override");
 
+#
 # Clean up files used for testing.
 #
-unlink $RC_FILE or die "Unable to clean up $RC_FILE.\n";
-remove_dir($TEST_DIR);
+unlink $HOME_RC_FILE or die "Unable to clean up $HOME_RC_FILE.\n";
+remove_dir($ABS_TEST_DIR);
 
diff --git a/t/testutil.pm b/t/testutil.pm
index 3510ab5..ff1e6b4 100755
--- a/t/testutil.pm
+++ b/t/testutil.pm
@@ -36,19 +36,21 @@ use Stow::Util qw(parent canon_path);
 
 use base qw(Exporter);
 our @EXPORT = qw(
+    $ABS_TEST_DIR
     $TEST_DIR
     $stderr
     init_test_dirs
     cd
     new_Stow new_compat_Stow
     make_path make_link make_invalid_link make_file
-    remove_dir remove_link
+    remove_dir remove_file remove_link
     cat_file
     is_link is_dir_not_symlink is_nonexistent_path
     capture_stderr uncapture_stderr
 );
 
 our $TEST_DIR = 'tmp-testing-trees';
+our $ABS_TEST_DIR = File::Spec->rel2abs('tmp-testing-trees');
 
 our $stderr;
 my $tied_err;
@@ -64,13 +66,17 @@ sub uncapture_stderr {
 }
 
 sub init_test_dirs {
-    for my $dir ("$TEST_DIR/target", "$TEST_DIR/stow") {
-        -d $dir and remove_tree($dir);
-        make_path($dir);
+    # Create a run_from/ subdirectory for tests which want to run
+    # from a separate directory outside the Stow directory or
+    # target directory.
+    for my $dir ("target", "stow", "run_from") {
+        my $path = "$TEST_DIR/$dir";
+        -d $path and remove_tree($path);
+        make_path($path);
     }
 
     # Don't let user's ~/.stow-global-ignore affect test results
-    $ENV{HOME} = $TEST_DIR;
+    $ENV{HOME} = $ABS_TEST_DIR;
 }
 
 sub new_Stow {