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Internal sources of finance and the Great Recession

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  • Michelle L. Barnes
  • N. Aaron Pancost
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    Abstract

    The rising stockpile of cash as a share of total assets at U.S. firms has intrigued economists since at least the paper of Bates, Kahle, and Stulz (2006), yet there has been relatively little work on where this cash has come from and how it is related to investment performance. We exploit Statement of Cash Flows data from Compustat to decompose firms' cash stocks and show that the rise in cash holdings has coincided with an increased willingness to save internally generated cash. We show that although investment is normally sensitive to externally generated cash, the increased sensitivity of investment to cash during the Great Recession is driven by cash from internal sources. Smaller firms were also more affected by the recent downturn than larger firms. Our results agree with the findings of Almeida, Campello, and Weisbach (2004) on cash hoarding and financial constraints, as well as the estimates in Duchin, Ozbas, and Sensoy (2010) on the important role of saved cash during the financial crisis.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Boston in its series Working Papers with number 10-15.

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    Date of creation: 2010
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    Handle: RePEc:fip:fedbwp:10-15

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    Keywords: Global financial crisis ; Recessions ; Corporations - Finance;

    This paper has been announced in the following NEP Reports:

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    1. Burcu Duygan-Bump & Alexey Levkov & Judit Montoriol-Garriga, 2010. "Financing constraints and unemployment: evidence from the Great Recession," Risk and Policy Analysis Unit Working Paper QAU10-6, Federal Reserve Bank of Boston.
    2. Simon Gilchrist & Charles P. Himmelberg, 1993. "Evidence on the role of cash flow for investment," Finance and Economics Discussion Series 93-7, Board of Governors of the Federal Reserve System (U.S.).
    3. Joao F. Gomes, 2001. "Financing Investment," American Economic Review, American Economic Association, vol. 91(5), pages 1263-1285, December.
    4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
    5. Sean Cleary & Paul Povel & Michael Raith, 2003. "The U-shaped Investment Curve: Theory and Evidence," Finance 0311010, EconWPA.
    6. Malcolm Baker & Jeremy C. Stein & Jeffrey Wurgler, 2002. "When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms," NBER Working Papers 8750, National Bureau of Economic Research, Inc.
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