Cash Reserves as a Hedge against Supply-Chain Risk

Manoj Kulchania and Shawn Thomas ()

Journal of Financial and Quantitative Analysis, 2017, vol. 52, issue 5, 1951-1988

Abstract: Deregulation of the trucking industry and significantly lowered transportation costs led to large, widespread, and plausibly exogenous reductions in inventory for U.S. firms, with consequent increased supply-chain disruption (SCD) costs. We find evidence that increased SCD costs help explain the puzzling long-term trend of increasing average U.S. firm cash holdings. We also find that firms facing higher expected costs of disruptions generally save more cash from capital freed up via supply-chain management innovations. Finally, we document significant postdisruption declines in cash holdings consistent with cash as a primary source of financing during disruptions.

Date: 2017
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