Do Financial Crises Affect Firms' Cash Holdings?

Abstract

We study the effect of financial crises on firms' cash holdings with a sample of 40 recent systemic banking crises. Consistent with the hypothesis that financial crises increase the likelihood of future crises and increase precautionary liquidity demand, we find that post-crisis firms increase their cash holdings. Furthermore, the increase in cash holdings is concentrated in more severe banking crises, proxied by output loss, fiscal costs of bank bailouts, peak NPAs and reduction in aggregate bank credit in the crisis, and crises in countries with banks dominated financial system.