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

Andreas Joseph, Christiane Kneer and Neeltje Van Horen ()

No 14199, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper studies how cash holdings at the onset of the global financial crisis afffected the investment behavior of SMEs after the shock. We use balance sheet data for a large sample of UK SMEs and introduce a novel identification strategy exploiting the volatility of cash holdings to reduce endogeneity concerns. We find that cash holdings are a key determinant of investment by SMEs not only during the crisis but also during the recovery period. Cash-rich SMEs could maintain their capital stock during the global financial crisis, while cash-poor rivals reduced theirs. This gave cash-rich SMEs an advantage when the economy rebounded, resulting in a persistent investment gap which grew over the seven years following the shock. The amplification effect was particularly pronounced for younger and smaller firms and in industries where credit conditions tightened more. Competition dynamics and borrowing constraints seem to drive this amplification effect.

Keywords: Firm investment; Cash holdings; Credit constraints; Financial crisis (search for similar items in EconPapers)
JEL-codes: E22 E32 E44 G32 (search for similar items in EconPapers)
Date: 2022-03
New Economics Papers: this item is included in nep-cfn and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Working Paper: All you need is cash: corporate cash holdings and investment after the financial crisis (2019)
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