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Managing Liquidity in Production Networks: The Role of Central Firms
[, and Ferrell A. (2009): What matters corporate governance?]

Author

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  • Janet Gao

Abstract

Firms in the US economy are closely interconnected in a production network and are subject to shocks that propagate within the network. This study examines the liquidity management of firms centrally connected in the network. I show that, while central firms are more exposed to aggregate swings, they maintain higher cash holdings to protect themselves and connected firms against such exposure. Central firms’ cash holding motives are alleviated by firm diversification but are aggravated by industry competition. Such motives are not explained by alternative determinants of cash policies. My findings suggest that systematically important firms proactively dampen the propagation of shocks in the production network.

Suggested Citation

  • Janet Gao, 2021. "Managing Liquidity in Production Networks: The Role of Central Firms [, and Ferrell A. (2009): What matters corporate governance?]," Review of Finance, European Finance Association, vol. 25(3), pages 819-861.
    • Handle: RePEc:oup:revfin:v:25:y:2021:i:3:p:819-861.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa025
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    Citations

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    Cited by:

    1. Yu, Miao & Hu, Xiaolu & Zhong, Angel, 2024. "Network centrality, information diffusion and asset pricing," International Review of Financial Analysis, Elsevier, vol. 93(C).
    2. Jessie Jiaxu Wang, 2023. "Workplace Automation and Corporate Liquidity Policy," Finance and Economics Discussion Series 2023-023, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    Keywords

    Production networks; Financial policies; Corporate liquidity; Trade credit;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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