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Long-Term Effects of a Financial Crisis: Evidence from Cash Holdings of East Asian Firms

Published online by Cambridge University Press:  02 February 2012

Kyojik (Roy) Song  and
Youngjoo Lee
Kyojik (Roy) Song
Affiliation:
Business School, Sungkyunkwan University, 53 Myoungnyun-dong 3-ga, Jongno-gu, Seoul 110-745, South [email protected]
Youngjoo Lee
Affiliation:
Business School, Sogang University, 35 Baekbeom-ro, Mapo-gu, Seoul 121-742, South Korea. [email protected]
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Abstract

We investigate the long-term effect of the Asian financial crisis on corporate cash holdings in 8 East Asian countries. The Asian firms build up cash holdings by decreasing investment activities after the crisis. We find that the increase in cash holdings is not explained by changes in firm characteristics but by changes in the firms’ demand function for cash, which indicates that the crisis has systematically changed the firms’ cash-holding policies. Specifically, the firms’ increased sensitivity to cash flow volatility is one of the main factors explaining the higher level of their cash holdings in the postcrisis period.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 3 , June 2012 , pp. 617 - 641
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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