Liquidity Crises and Corporate Cash Holdings in Chile

This paper addresses the way optimal cash holdings decisions may be affected in episodes of adverse liquidity shocks. Motivated by the recent financial crisis, we are particularly interested in understanding how firm characteristics can explain differences in the adjustment speed to desired cash holdings, and how these characteristics determine whether a firm is more or less affected during a liquidity crisis. To address those issues, we use a large panel dataset with quarterly information of Chilean firms during the period 1996 through 2009. In line with some previous empirical evidence, our findings show that leverage, banking debt, liquid assets, size and volatility affect cash holdings. We also find that liquidity crises have had an overall negative and economically significant effect on the firms’ cash holdings and this effect varies across firm size. In addition, our results reveal other important component of heterogeneity across firms: we find that medium-sized firms are less capable of adjusting cash holdings than do small and large firms.