Measuring the Value of Corporate Cash Holdings against Predictable and Unpredictable Negative Shocks

Abstract

This paper explores how cash mitigates predictable and unpredictable adverse cash flow shocks to firms using the financial data of Japanese firms. We find that (i) cash has no value after the predicted shock regardless of the severity of the financial constraint, (ii) after the unpredicted shock, the value of cash for the financially constrained firms is larger than that for the unconstrained firms, and (iii) the value of cash is similar between the two shocks for the unconstrained firms, while the value is larger when the unpredicted shock occurs than when the predicted shock occurs for the constrained firms.

Keywords: consumption tax hike, COVID-19, cash holdings, financial constraint, event study

JEL Classification: G14, G32