Corporate Cash and Employment
50 Pages Posted: 14 Feb 2014
There are 2 versions of this paper
Corporate Cash and Employment
Corporate Cash and Employment
Date Written: January 27, 2014
Abstract
In the aftermath of the U.S. financial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we document that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across firms. We develop a dynamic general equilibrium model where heterogenous firms need cash in their production process. We analyze the dynamic impact of aggregate shocks and the cross- firm impact of idiosyncratic shocks. We show that liquidity and productivity shocks tend to generate a negative comovement between the cash ratio and employment. In contrast, standard credit shocks produce a positive relationship. A calibrated version of the model yields a negative comovement that is close to the data.
Keywords: working capital, liquidity shocks, cash management
JEL Classification: E44, G32, E24
Suggested Citation: Suggested Citation