All You Need is Cash: Corporate Cash Holdings and Investment after a Crisis
54 Pages Posted: 4 May 2020
Date Written: April 28, 2020
Cash is king as corporate revenues plummet during the COVID-19 lockdown. Evidence from the global financial crisis shows that firms with high pre-crisis cash holdings can invest during a crisis while their cash-poor rivals have to divest. This gives cash-rich firms a competitive advantage during the recovery period, resulting in a persistent and growing investment gap. The divergence in investment paths between cash-rich and cash-poor firms is particularly large for financially constrained firms and is absent during tranquil periods. Due to their ability to invest in a crisis, cash-rich firms can gain market share and accumulate more profits in the long-run. Cash balances at the onset of a downturn are therefore a key determinant as to whether firms emerge as winners or losers from a crisis.
Keywords: Firm investment, cash holdings, credit constraints, financial crisis
JEL Classification: E22, E32, E44, G32
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