DP10309 Corporate Cash and Employment

Author(s): Philippe Bacchetta, Kenza Benhima, CĂ©line Poilly
Publication Date: December 2014
Keyword(s): financial shocks, liquidity, working capital
JEL(s): E24, E44, G32
Programme Areas: International Macroeconomics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10309

In the aftermath of the U.S. financial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we document that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across firms. We develop a dynamic general equilibrium model where heterogenous firms need cash in their production process and where financial shocks are made of both credit and liquidity shocks. We show that external liquidity shocks generate a negative comovement between the cash ratio and employment. We analyze the dynamic impact of aggregate shocks and the cross-firm impact of idiosyncratic shocks. With a calibrated version of the model, the model yields a negative comovement that is close to the data.