Cash is king during the COVID crisis

Dash for cash

In this paper Acharya and Steffen use a U.S. dataset of daily credit line drawdowns at the firm-loan-level to study how firms that had secured access to different sources of liquidity before the crisis fared compared to firms lacking in such access. Their findings include:

• The U.S. stock market rewarded firms with access to liquidity through either cash or committed lines of credit from banks;
• AAA-A rated firms, i.e., high-quality investment-grade firms, issued bonds in public capital markets, particularly after the Federal Reserve Bank initiated its corporate bond buying program;
• Bond issuances of BBB-rated firms, i.e., the lowest-rated investment-grade firms, remained mostly flat as these firms rushed to convert their credit line commitments from banks into cash accounting for about half of all the credit line drawdowns.

They conclude:

Even though banks are better capitalized compared to 2007 and before the global financial crisis, the accelerated drawdowns of credit lines and provision for possible future credit losses for on-balance sheet exposures might bring them closer to the regulatory minimum capital requirement, which not only endangers their financial stability but can constrain future intermediation with likely spillovers into the real economy.

The risk of being a fallen angel and the corporate dash for cash in the midst of COVID
Authors: Viral V. Acharya, Sascha Steffen
From: New York University, Frankfurt School of Finance & Management

Cash rich firms and investments

Joseph and al. use a firm-level dataset with balance sheet information of private firms and publicly listed companies based in the UK to study how pre-crisis cash holdings affect firms’ investment decisions. They found that during the global financial crisis:

• Firms with high pre-crisis cash holdings, were able to replace depreciating fixed assets and continue investing while their cash-poor rivals had to divest;
• Cash-rich firms gained a competitive advantage during the recovery period, resulting in an amplification of the investment gap. This persistent and widening investment gap between cash-rich and cash-poor firms was not present in the pre-crisis period;
• Cash holdings before the onset of the crisis had a positive effect on market share growth during the crisis and this effect was again amplified during the recovery phase.

All You Need is Cash: Corporate Cash Holdings and Investment after a Crisis
Authors: Andreas Joseph, Christiane Kneer, Neeltje van Horen
From: Bank of England