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

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.