All You Need is Cash: Corporate Cash Holdings and Investment after the Financial Crisis

This paper shows that after the global financial crisis UK firms with high pre-crisis cash holdings relative to their industry rivals invest significantly more than their cash-poor counterparts. The differential effect already appears during the crisis but amplifies throughout the recovery phase, resulting in a persistent and growing investment gap. This amplification effect is absent in the pre-crisis period. Over the same period, cash-rich firms persistently capture market share from their cash poor rivals, especially in industries where rivals are financially constrained, less affected by the crisis, and more competitive, suggesting that the ability to continue to invest during the crisis gives cash-rich firms a competitive edge that lasts far beyond the crisis years. Consistent with a causal effect of a shock to firms borrowing capacity, the positive impact of being cash-rich is greatest for young and small firms. Our results show that liquid assets are a much more important determinant of firms’ long-term growth after a financial crisis than previously thought.