How Do Firms Learn? Evidence from Corporate Cash Holdings During Covid-19 Pandemic

• In Event: Student Track: Accounting and COVID-19

Abstract

Amid the storm of Covid-19 that has had an irreversible effect on the health of hundreds of economies and millions of individuals globally, we examine the impact of this pandemic on U.S. corporate cash holdings. Our findings suggest that greater pandemic exposure is associated with higher corporate cash. In particular, a one-standard-deviation increase in Covid-19 exposure is associated with a 5.31 percentage point or $62.4 million increase in cash holdings. While it is hardly questionable that the pandemic influences cash policy, it is less clear whether prior experiences such as prior SARS/H1N1 epidemic exposure, financial constraints during the 2008 credit crisis and political connections lead firms to increase or decrease their cash hoard systematically. Our results indicate that firms indeed learn from prior experiences as they manage corporate cash policy. More specifically, the level of cash hoard in politically-connected firms and firms with prior SARS/H1N1 exposure is significantly lower than their politically-inactive counterparts and in firms with no prior epidemic experience. In contrast, firms that experienced severe financial constraints during the 2008 credit crisis tend to increase their cash positions. Overall, our findings support the learning behavior of cash and contribute to corporate cash holdings literature by providing insights on the extent to which firms learn from prior experiences to manage their liquidity.

Authors

• Bishal BC, Grand Valley State University - Grand Rapids

• Thuy Simpson, Grand Valley State University