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The role of cash holdings during financial crises

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  • Chang, Chong-Chuo
  • Yang, Han

Abstract

We examine the role of cash holdings during crises, whether the firm with higher cash holdings could quickly recover the operating performance after the financial crisis. We find that if a firm has higher cash holdings, its operating performance recovers more rapidly after financial crisis; these results hold after accounting for endogeneity and various robustness tests. Regarding possible transmission channels, we find that higher cash holdings increase capital expenditures and R&D expenditures, which improves firms' performance more rapidly after financial crisis. Furthermore, differences in financing constraints, corporate governance, and degree of financial development affect the relationship between cash holdings and post-crisis speed of recovery. Thus, firms should judiciously reserve cash holdings in their accounts to safeguard against unexpected emergencies.

Suggested Citation

  • Chang, Chong-Chuo & Yang, Han, 2022. "The role of cash holdings during financial crises," Pacific-Basin Finance Journal, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:pacfin:v:72:y:2022:i:c:s0927538x22000282
    DOI: 10.1016/j.pacfin.2022.101733
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    More about this item

    Keywords

    Cash holdings; Financial crises; Recession; Speed of recovery; Operating performance;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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