Working Paper: CEPR ID: DP14199
Authors: Andreas Joseph; Christiane Kneer; Neeltje van Horen
Abstract: This paper studies how cash holdings at the onset of the global financial crisis afffected the investment behavior of SMEs after the shock. We use balance sheet data for a large sample of UK SMEs and introduce a novel identification strategy exploiting the volatility of cash holdings to reduce endogeneity concerns. We find that cash holdings are a key determinant of investment by SMEs not only during the crisis but also during the recovery period. Cash-rich SMEs could maintain their capital stock during the global financial crisis, while cash-poor rivals reduced theirs. This gave cash-rich SMEs an advantage when the economy rebounded, resulting in a persistent investment gap which grew over the seven years following the shock. The amplification effect was particularly pronounced for youngerand smaller firms and in industries where credit conditions tightened more. Competition dynamics and borrowing constraints seem to drive this amplification effect.
Keywords: firm investment; cash holdings; credit constraints; financial crisis
JEL Codes: E22; E32; E44; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High initial cash holdings (G32) | Maintain or increase fixed assets (G31) |
| Cash-poor firms (G32) | Reduce fixed assets (G32) |
| Investment gap between cash-rich and cash-poor firms (G32) | Persist and grow during recovery phase (D25) |
| Cash-rich firms (G32) | Capture more market share (D49) |
| Cash-poor firms (G32) | Struggle to recover (H12) |
| Positive impact of cash holdings (G32) | Stronger for younger and smaller firms (L26) |