Do Business Cycles Influence Corporate Cash Holdings?

Abstract

This paper examines the relationship between cash holdings and business cycles between 1976 and 2012, with a primary emphasis on how cash holdings vary during the business cycle and specifically during recessions. Using several different quarterly data sets, findings confirm that cash holdings do vary over the business cycle. Upon further examination, corporate cash holdings initially decline during recessions but increase to levels at or above pre-crisis levels. In addition, cash holdings appear to increase around the National Bureau of Economic Research’s announcements of recessions. Therefore, we do not find evidence of the precautionary motive for cash holdings during recessions but we do find evidence of an announcement effect for cash holdings.

Keywords: cash, cash holdings, recession, business cycles, precautionary motive, announcement effect

JEL Classification: G30, G32, G01