Liquidity Management through Contracts with Customers

69 Pages Posted: 11 Oct 2022 Last revised: 19 Nov 2024

See all articles by Chris Lien

Chris Lien

University of Illinois at Urbana-Champaign - Department of Finance; National Taiwan University - Department of International Business

Date Written: September 5, 2021

Abstract

Analyzing hand-collected, granular disclosures of customer contracts mandated by IFRS 15 and ASC 606 for a sample of Compustat firms from 2018 to 2020, we uncover novel stylized facts that one-third of firms have unfulfilled obligations totaling $2 trillion, with nearly one-quarter (or $500 billion) pre-collected as cash. We are the first to document that such contracting behaviors are economically important and materially impact corporate liquidity management. We also find that cash from contracts is used more extensively by firms with high liquidity demand, limited access to bank credit, or negative EBITDA. Exploiting firms' predetermined heterogeneous exposure to disease risk and unexpected disease events COVID-19 as exogenous liquidity shocks, we find that firms with higher pre-existing disease exposure increase their contract-based cash more significantly than comparable firms, with this effect amplified for financially constrained companies. Customer dependency and contracting frictions influence both the cross-sectional use of these contracts and firms' responses to unexpected liquidity demand.

Keywords: Corporate Liquidity Management, Contracts with Customers, COVID-19 Economy, Supply Chain Finance, IFRS 15, ASC 606

JEL Classification: G21, G23, G32, G30

Suggested Citation

Lien, Chris,

Liquidity Management through Contracts with Customers

(September 5, 2021). Available at SSRN: https://ssrn.com/abstract=4210805 or http://dx.doi.org/10.2139/ssrn.4210805

Chris Lien (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

National Taiwan University - Department of International Business ( email )

50, Lane 144, Section 4, Keelung Road
Taipei 106
Taiwan

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