Long-Term Effects of a Financial Crisis: Evidence from Cash Holdings of East Asian Firms

48 Pages Posted: 28 Aug 2007 Last revised: 7 Mar 2011

See all articles by Kyojik Song

Kyojik Song

Sungkyunkwan University

Young-Joo Lee

State University of New York (SUNY) - Buffalo

Date Written: December 24, 2010

Abstract

We investigate the long-term effect of the Asian financial crisis on corporate cash holdings in eight East Asian countries. The median cash to assets ratio for the Asian firms almost doubles from 6.7% in 1996 to 12.1% in 2006, and the sudden increase in cash holdings is pervasive regardless of financial constraints. The Asian firms build up cash holdings by decreasing investment activities such as capital expenditures and acquisitions after the crisis. We find that the increase in cash holdings is not explained by changes in firm characteristics but by change in the firms’ demand function for cash, which indicates that the crisis has systematically changed the firms’ cash holding policies. Specifically, the firms’ increased sensitivity to cash flow volatility is one of the main factors to explain the higher level of their cash holdings in the post-crisis period. These findings are partially consistent with the precautionary motive of cash holdings in that financial crisis can make the management policies of firms very conservative even after the economy recovers from the crisis.

Keywords: Cash holdings, Asian financial crisis, Cash flow risk

JEL Classification: G3, G32

Suggested Citation

Song, Kyojik and Lee, Young-Joo, Long-Term Effects of a Financial Crisis: Evidence from Cash Holdings of East Asian Firms (December 24, 2010). 20th Australasian Finance & Banking Conference 2007 Paper, Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1008246

Kyojik Song (Contact Author)

Sungkyunkwan University ( email )

53 Myeongnyun-dong 3-ga Jongno-ju
Guro-gu
Seoul, 110-745
Korea, Republic of (South Korea)
82-2-760-0497 (Phone)

Young-Joo Lee

State University of New York (SUNY) - Buffalo ( email )

12 Capen Hall
Buffalo, NY 14222
United States

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