Demand Shock, Liquidity Management, and Firm Growth During the Financial Crisis

59 Pages Posted: 13 Nov 2015 Last revised: 23 Jun 2022

See all articles by Vojislav Maksimovic

Vojislav Maksimovic

University of Maryland - Robert H. Smith School of Business

T. Mandy Tham

Nanyang Technological University (NTU); Singapore Management University - Lee Kong Chian School of Business

Youngsuk Yook

Board of Governors of the Federal Reserve System

Date Written: October, 2015

Abstract

We examine the transmission of liquidity across the supply chain during the 2007-09 financial crisis, a period of financial market illiquidity, for a sample of unrated public firms with differential demand shocks. We measure differential demand by comparing firms that primarily supply to government customers with those that primarily supply to corporate customers. A difference-in-difference analysis shows little evidence that relatively high demand firms provide more or less liquidity to their own suppliers. The main determinant of the usage of short-term financing is a product market shock. Firms with relatively high demand have higher raw-material inventory and use more trade credit. There is little evidence that the amount of credit usage per unit of raw-material inventory changes with firms' demand shocks. These outcomes are consistent with theories of trade credit that stress the use of trade credit in financing inputs rather than providing efficient monitoring of creditors by suppliers. The lack of liquidity provision to suppliers by high demand firms is likely due to the high opportunity costs they face: We show that such firms become more investment-constrained over the crisis and engage in more acquisition activities once the liquidity crunch dissipates.

Keywords: Financial crisis, demand shocks, liquidity management, trade credit, inventory

Suggested Citation

Maksimovic, Vojislav and Tham, Tze-Minn and Tham, Tze-Minn and Yook, Youngsuk, Demand Shock, Liquidity Management, and Firm Growth During the Financial Crisis (October, 2015). FEDS Working Paper No. 2015-96, Available at SSRN: https://ssrn.com/abstract=2684652 or http://dx.doi.org/10.17016/FEDS.2015.096

Vojislav Maksimovic (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

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HOME PAGE: http://scholar.rhsmith.umd.edu/vmax/home

Tze-Minn Tham

Nanyang Technological University (NTU) ( email )

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Singapore, 639798
Singapore
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Singapore Management University - Lee Kong Chian School of Business ( email )

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Singapore 178899
Singapore

Youngsuk Yook

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States
202-475-6324 (Phone)

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