Internal Sources of Finance and the Great Recession

36 Pages Posted: 21 Nov 2010 Last revised: 4 Jul 2011

See all articles by Michelle L. Barnes

Michelle L. Barnes

Federal Reserve Bank of Boston

N. Aaron Pancost

University of Texas at Austin McCombs School of Business

Date Written: December 21, 2010

Abstract

We exploit Statement of Cash Flows data from Compustat to decompose firms' cash stocks by source and show that the rise in cash holdings since the late 1980s was driven by externally generated cash until 2000, and by internally generated cash afterwards. Firms stockpiling externally generated cash are smaller, do not pay dividends or buy back equity shares, have operating losses, and are in industries whose average cash-flow volatility has increased over our sample period. This suggests that for these firms the transactions motive for accumulating cash may be at least as important as the precautionary motive. We also show that although investment is normally sensitive to externally generated cash, the increased sensitivity of investment to cash during the Great Recession is driven by cash from internal sources. Including external cash in our regression specification controls for the transactions motive, allowing us to isolate it from the e ffect of binding financial constraints in a difficult credit environment. This approach indicates that while financially constrained firms included surprisingly large firms during the Great Recession, smaller firms were more a ffected by the recent downturn than larger firms.

Keywords: Corporate Investment, Corporate Liquidity, Cash, Financial Constraints, Great Recession

JEL Classification: G01, G31, G32

Suggested Citation

Barnes, Michelle L. and Pancost, N. Aaron, Internal Sources of Finance and the Great Recession (December 21, 2010). Available at SSRN: https://ssrn.com/abstract=1708204 or http://dx.doi.org/10.2139/ssrn.1708204

Michelle L. Barnes

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

N. Aaron Pancost (Contact Author)

University of Texas at Austin McCombs School of Business ( email )

Red McCombs School of Business
Austin, TX 78712
United States

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