Liquidity Management through Contracts with Customers

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