Cash Reserves as a Hedge Against Supply-Chain Risk
66 Pages Posted: 6 Feb 2014 Last revised: 7 Apr 2017
Date Written: March 29, 2017
Deregulation of the trucking industry and significantly lowered transportation costs led to large, widespread, and plausibly exogenous reductions in inventory for U.S. firms, but with consequent increased supply chain disruption costs. We find evidence that increased supply chain disruption 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 post-disruption declines in cash holdings consistent with cash as a primary source of financing during disruptions.
Keywords: Inventory, Cash, Supply chain disruption
JEL Classification: G31, G32
Suggested Citation: Suggested Citation