Borrowing in Unsettled Times and Cash Holdings Afterwards
49 Pages Posted: 7 Sep 2019 Last revised: 12 Oct 2020
Date Written: October 9, 2020
We find firms which successfully obtained a bank loan in a crisis period reduced their cash holdings post-crisis, using Japanese data from the 2008 financial crisis. Firms received loans primarily from non-main banks. These in-crisis loans reduced cash holdings afterwards. We observe this substitution between borrowing and cash holdings among firms with an executive who had served as a financial officer in the crisis. The shift to non-main bank loans resulted in a substantial reduction in borrowing costs after the crisis. These findings are consistent with theories of relationship banking. They predict that executives’ confidence in the availability of non-main bank loans reduces their precautionary cash holdings both to address a liquidity shortage and to mitigate a hold-up by their main bank. We also find that those who reduced their cash holdings in the post-crisis period invested their excess cash in overseas investment opportunities through their subsidiaries. This finding highlights that the improved confidence in arm’s length financing encourages managers to spend cash productively.
Keywords: Financial Crisis; Cash Holdings; Relationship Banking; Hold-up Problem; Bank Consolidation
JEL Classification: G21, G31, G32
Suggested Citation: Suggested Citation