Before the Storm: Firm Policies and Varying Recession Risk

78 Pages Posted: 15 Mar 2023 Last revised: 26 Mar 2024

See all articles by Ali Kakhbod

Ali Kakhbod

University of California, Berkeley

Dmitry Livdan

University of California, Berkeley

A. Max Reppen

Boston University - Questrom School of Business

Tarik Umar

Rice University

Date Written: March 19, 2024

Abstract

We develop a model with varying recession risk and find that the precautionary actions of large firms ``before the storm'' are more sensitive to these changes. Smaller firms take precautionary steps when recession risk is low to protect their attractive investment program. Otherwise, investment decreases cash holdings and increases liquidation risk in a recession. By contrast, large firms postpone precautionary actions since they invest at lower rates, allowing cash to accumulate. However, when a recession becomes more likely, large firms have less time to accumulate cash, so they cannot delay precautionary measures. We provide empirical evidence to support these predictions.

Keywords: Recession, business cycles, risk management, financial crises, liquidity.

JEL Classification: E22, E44, G30

Suggested Citation

Kakhbod, Ali and Livdan, Dmitry and Reppen, Anders and Umar, Tarik, Before the Storm: Firm Policies and Varying Recession Risk (March 19, 2024). Available at SSRN: https://ssrn.com/abstract=4385574 or http://dx.doi.org/10.2139/ssrn.4385574

Ali Kakhbod (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Anders Reppen

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Tarik Umar

Rice University ( email )

Houston, TX
United States

HOME PAGE: http://https://business.rice.edu/person/tarik-umar

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