Cash Holdings and the Crisis: A study of U.S. corporate cash holdings during and after the financial crisis of 2008

Jacob Martin Wiborg Rode & Søren Fabian Heupel

Student thesis: Master thesis


This thesis investigates U.S. corporate cash holdings in the light of the financial crisis of 2008. Towards this end, we research the determinants of corporate cash holdings and then study their development before, during, and after the financial crisis. Our initial research encompasses a comprehensive literature review and a systematic content analysis of media publications such as The Economist, The Wall Street Journal, and CFO Magazine. In total, we analyze 113 media articles published between 2004 and 2013. The results of our initial research are then synthesized into a set of distinct hypotheses. We test these empirically, mainly with regression analysis, using a Compustat sample of 44,275 firm-year observations of U.S.-based public companies between 1998 and 2012. Overall, we conclude that the financial crisis has had a profound impact on corporate cash holdings. Regarding the determinants of cash holdings, we find that observed cash holdings must be understood as a combination of targeted cash holdings and shocks to these, and that targeted cash holdings are primarily determined by precautionary motives. Regarding the development of the determinants of cash holdings, we conclude that three major effects influenced cash holdings over the course of the financial crisis. Our results show that the immediate effect of the crisis was a negative shock to cash holdings caused by the recession and credit crunch. Thus, actual cash holdings fell below targeted cash holdings in 2008. At the same time, however, firms were actually increasing their targeted cash holdings due to elevated risk and risk aversion also caused by the crisis. In the aftermath of the crisis, the situation changed and firms’ actual cash holdings surpassed their targets. This was due to recovered operating cash flows, a lack of investment opportunities, and, for firms with an investment grade debt rating, cheap and easy access to external finance. Hence, we show that the development of corporate cash holdings observed between 2008 and 2012 is caused by the interplay of different, and at times opposing, mechanisms.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2014
Number of pages187