All You Need is Cash: Corporate Cash Holdings and Investment after the Financial Crisis

54 Pages Posted: 17 Dec 2019 Last revised: 27 May 2022

See all articles by Andreas Joseph

Andreas Joseph

Bank of England

Christiane Kneer

Bank of England

Neeltje van Horen

Bank of England; Centre for Economic Policy Research (CEPR)

Jumana Saleheen

Bank of England

Multiple version iconThere are 2 versions of this paper

Date Written: April 2022

Abstract

This paper studies how cash holdings at the onset of the global financial crisis afffected the investment behavior of SMEs after the shock. We use balance sheet data for a large sample of UK SMEs and introduce a novel identification strategy exploiting the volatility of cash holdings to reduce endogeneity concerns. We find that cash holdings are a key determinant of investment by SMEs not only during the crisis but also during the recovery period. Cash-rich SMEs could maintain their capital stock during the global financial crisis, while cash-poor rivals reduced theirs. This gave cash-rich SMEs an advantage when the economy rebounded, resulting in a persistent investment gap which grew over the seven years following the shock. The amplification effect was particularly pronounced for younger

and smaller firms and in industries where credit conditions tightened more. Competition dynamics and borrowing constraints seem to drive this amplification effect.

Keywords: cash holdings, credit constraints, financial crisis, Firm Investment

JEL Classification: E22, E32, E44, G32

Suggested Citation

Joseph, Andreas and Kneer, Christiane and van Horen, Neeltje and Saleheen, Jumana, All You Need is Cash: Corporate Cash Holdings and Investment after the Financial Crisis (April 2022). CEPR Discussion Paper No. DP14199, Available at SSRN: https://ssrn.com/abstract=3504629

Andreas Joseph (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Christiane Kneer

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Neeltje Van Horen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

HOME PAGE: http://https://www.bankofengland.co.uk/research/Researchers/neeltje-van-horen

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jumana Saleheen

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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