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Internal sources of finance and the Great Recession

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  • Michelle L. Barnes
  • N. Aaron Pancost

Abstract

The rising stockpile of cash as a share of total assets at U.S. firms has intrigued economists since at least the paper of Bates, Kahle, and Stulz (2006), yet there has been relatively little work on where this cash has come from and how it is related to investment performance. We exploit Statement of Cash Flows data from Compustat to decompose firms' cash stocks and show that the rise in cash holdings has coincided with an increased willingness to save internally generated cash. We show that although investment is normally sensitive to externally generated cash, the increased sensitivity of investment to cash during the Great Recession is driven by cash from internal sources. Smaller firms were also more affected by the recent downturn than larger firms. Our results agree with the findings of Almeida, Campello, and Weisbach (2004) on cash hoarding and financial constraints, as well as the estimates in Duchin, Ozbas, and Sensoy (2010) on the important role of saved cash during the financial crisis.

Suggested Citation

  • Michelle L. Barnes & N. Aaron Pancost, 2010. "Internal sources of finance and the Great Recession," Working Papers 10-15, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:10-15
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    References listed on IDEAS

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    Cited by:

    1. Robert Pollin & James Heintz, 2013. "Study of U.S. Financial System," FESSUD studies fstudy10, Financialisation, Economy, Society & Sustainable Development (FESSUD) Project.

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    Keywords

    Global financial crisis; Recessions; Corporations - Finance;
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