Belief Updating on Bank Credit Availability and Cash Holdings
36 Pages Posted: 7 Sep 2019 Last revised: 1 Nov 2019
Date Written: October 31, 2019
Contrary to recent studies, we find that firms reduced cash holdings after experiencing financial distress, exploiting Japanese data from around the 2008 financial crisis. The reduction was long-lasting – for nearly ten years. The substitution between in-crisis borrowing and post-crisis cash holdings was one-to-one in the five years after the crisis. We attribute our finding to these firms’ rational belief updating on bank credit availability through their success in obtaining emergency loans, in line with the implicit insurance theory of relationship banking. We observe this negative association among firms which had the following characteristics prior to the crisis: above-median market-to-book-ratio, above-median cash holdings, and firms whose main bank had merged. Interestingly, firms received loans primarily from non-main banks. It suggests that they had diversified their pool of lenders to avoid a hold-up problem. Furthermore, these firms spent the excessive cash on equity investment in their affiliates through internal capital markets. Our paper highlights the critical role of the banking sector in mitigating the negative consequences of financially distressed experiences.
Keywords: Belief Updating, Financial Crisis, Cash Holdings, Relationship Banking
JEL Classification: G21, G31, G32
Suggested Citation: Suggested Citation