Working Paper: CEPR ID: DP8278
Authors: Charlotte Ostergaard; Amir Sasson; Bent E. Sorensen
Abstract: We study how nonlisted firms trade off financial, real, and distributive uses of cash. We show that firms' marginal value of cash (MVC)affects the mix of external and internal finance used to absorb fluctuations in cash flows; in particular, high-MVC firms employ substantially more external finance on the margin. Linking firms to their main bank, we find that shocks to bank finance affect firms' trade-offs and have real effects in high-MVC firms, making investment more sensitive to firm cash flow. Our analysis suggests that shocks to external financing costs are transmitted to the real economy via firms' marginal value of cash.
Keywords: bank lending channel; cash flow tradeoffs; cash holdings; external financing costs; nonlisted firms
JEL Codes: G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high marginal value of cash (MVC) firms (G32) | employ more external finance (G39) |
| shocks to bank finance (G21) | affect tradeoffs made by firms (D21) |
| shocks to bank finance (G21) | real effects on investment decisions in high MVC firms (G11) |
| marginal cost of borrowing increases following a bank shock (E44) | raises the MVC (Y60) |
| high MVC firms (L25) | greater sensitivity to changes in cash flow (G32) |
| low MVC firms (D21) | less sensitivity to external financing shocks (F65) |