Impacts of COVID-19 pandemic on corporate cash holdings: Evidence from Korea

Hae Jin Chung, Hogyu Jhang and Doojin Ryu

Emerging Markets Review, 2023, vol. 56, issue C

Abstract: We examine how corporate cash management in Korea has evolved during the COVID-19 crisis, focusing on the interaction between COVID-19-related uncertainty and financing frictions. Compared with the 2008 global financial crisis, massive expansionary financial policy measures have resulted in low external financing costs shortly after the early negative shocks to external financing. This provides a unique opportunity to investigate the separate effects of uncertainty and financing frictions on corporate cash holdings. Consistent with the precautionary motive for cash holdings, we find that firms reserve more cash in 2020 in response to the increased uncertainty; this is especially the case if they are negatively affected by the COVID-19 crisis and financially constrained. However, unaffected firms with better access to financial markets and internal capital markets also increase their cash holdings. The COVID-19 pandemic does not systematically change corporate cash management policies. In 2021, firms decrease their cash holdings as uncertainty declines. Overall, our evidence implies that uncertainty is the primary determinant of corporate cash management decisions, whereas financing frictions play a secondary role. We discuss the policy implications of the amplified inequality between financially constrained and unconstrained firms resulting from massive expansionary financial policy measures.

Keywords: Cash holdings; Cash management; COVID-19; Precautionary motive; Quantitative easing (search for similar items in EconPapers)
JEL-codes: G30 G32 G38 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ememar:v:56:y:2023:i:c:s1566014123000602

DOI: 10.1016/j.ememar.2023.101055

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