Borrowing in Unsettled Times and Cash Holdings Afterwards

We find that firms which successfully obtained a bank loan in a crisis reduced their cash holdings in the post-crisis period, exploiting Japanese data from around the 2008 financial crisis. The reduction was long-lasting – nearly ten years. The substitution between in-crisis borrowing and post-crisis cash holdings was one-to-one in the five years after the crisis. We attribute our finding to these firms’ reduced uncertainty about bank credit availability through their success in obtaining emergency loans. We observe this negative association among firms whose main bank had merged before the crisis. Interestingly, firms received loans primarily from non-main banks. It suggests that they had diversified their pool of lenders to avoid a hold-up problem. Furthermore, these firms spent the excess cash on equity investment in their affiliates through internal capital markets. Our paper highlights the critical role of the banking sector in mitigating the negative consequences of financially distressed experiences.