Managing Liquidity in Production Networks: The Role of Central Firms

Review of Finance, Forthcoming

60 Pages Posted: 21 Aug 2014 Last revised: 28 Sep 2020

See all articles by Janet Gao

Janet Gao

Indiana University - Kelley School of Business

Date Written: September 8, 2020

Abstract

Firms in the U.S. economy are closely interconnected in a production network and are subject to shocks that propagate within the network. This study examines the liquidity management of firms centrally connected in the network. I show that, while central firms are more exposed to aggregate swings, they maintain higher cash holdings to protect themselves and connected firms against such exposure. Central firms’ cash holding motives are alleviated by firm diversification but are aggravated by industry competition. Such motives are not explained by alternative determinants of cash policies. My findings suggest that systematically important firms proactively dampen the propagation of shocks in the production network.

Keywords: Production Networks, Financial Policies, Corporate Liquidity, Trade Credit

JEL Classification: G32, G33, L14

Suggested Citation

Gao, Janet, Managing Liquidity in Production Networks: The Role of Central Firms (September 8, 2020). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2483546 or http://dx.doi.org/10.2139/ssrn.2483546

Janet Gao (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

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