 Saving for a rainy day: Evidence from the 2000 dot-com crash and the 2008 credit crisisHsuan-Chi Chen, Robin K. Chou and Chien-Lin Lu Journal of Corporate Finance, 2018, vol. 48, issue C, 680-699 Abstract: This article examines the role of pre-saved cash in helping financially constrained firms during the 2000 dot-com crash and the 2008 financial crisis, both of which were exogenous shocks to industrial firms. The results show that constrained firms tended to increase capital investments during these severe economic downturns if they had pre-saved more cash. Constrained firms instead exhibited lower excess returns and incurred higher likelihoods of financial distress during the severe downturns if they had saved less cash prior to the events. Firms that experienced the 2000 dot-com crash and saved cash thereafter were less likely to default during the 2008 financial crisis, indicating the existence and benefit of learning effects. This study supports a precautionary motive for cash savings, showing that pre-saved cash helps financially constrained firms fund investment and reduces the likelihood of financial distress during severe market downturns. It demonstrates that saving for a rainy day really is valuable. Keywords: Cash holdings; Financial crisis; Financial distress; Value of cash (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:48:y:2018:i:c:p:680-699 DOI: 10.1016/j.jcorpfin.2017.12.025 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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