DP14199 All You Need is Cash: Corporate Cash Holdings and Investment after the Financial Crisis

Author(s): Andreas Joseph, Christiane Kneer, Jumana Saleheen, Neeltje Van Horen
Publication Date: December 2019
Date Revised: January 2020
Keyword(s): cash holdings, credit constraints, financial crisis, Firm Investment
JEL(s): E22, E32, E44, G32
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14199

Firms with high pre-crisis cash holdings invested significantly more than their cash-poor rivals during the global financial crisis and especially so during the recovery phase. This resulted in a persistent and growing investment gap between cash-rich and cash-poor firms. Cash especially benefitted young and small firms and firms in industries where rivals became more financially constrained. The amplification effect of cash was absent in the period preceding the crisis. The ability to continue to invest allowed cash-rich firms to gain market share and accumulate more profits over the long-run. Having a liquid balance sheet when the credit cycle turns thus gives firms a competitive edge that lasts far beyond the crisis years.