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

54 Pages Posted: 4 May 2020

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)

Date Written: April 28, 2020

Abstract

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

Suggested Citation

Joseph, Andreas and Kneer, Christiane and van Horen, Neeltje, All You Need is Cash: Corporate Cash Holdings and Investment after a Crisis (April 28, 2020). Available at SSRN: https://ssrn.com/abstract=3592376 or http://dx.doi.org/10.2139/ssrn.3592376

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
174
Abstract Views
580
rank
213,483
PlumX Metrics