Social Connections and Liquidity Hoarding

Abstract

This paper aims to quantify liquidity hoarding - the over-accumulation of cash by a firm in expectation of a supply side credit reduction. Changes in expectations on future credit supply are identified using credit shocks to distant social connections. I believe this novel identification is able to isolate the effects of change in expectations not driven by changes in own credit supply. I find evidence of liquidity hoarding by counties not affected by financial crisis themselves but whose distant friends were affected by credit supply cuts. This effect appears to be large and multiplicative. The results seem to be confirmed in the time series and also consistent with spread of fin-tech lending for small businesses. The results are not explained by spillover, productivity shift, bank supply shift or homophily based explanations. I believe I am able to add to a long line of literature on liquidity hoarding and its potential negative externalities including credit runs. The paper also shows that social connections may matter in firm credit decisions.