Corporate Cash and Employment

Abstract

In the aftermath of the U.S. …nancial crisis, both a sharp drop in employment and a surge in corporate cash have been observed. In this paper, based on U.S. data, we document that the negative relationship between the corporate cash ratio and employment is systematic, both over time and across …rms. We develop a dynamic general equilibrium model where heterogenous …rms need cash in their production process. We analyze the dynamic impact of aggregate shocks and the cross-…rm impact of idiosyncratic shocks. We show that liquidity and productivity shocks tend to generate a negative comovement between the cash ratio and employment. In contrast, standard credit shocks produce a positive relationship. A calibrated version of the model yields a negative comovement that is close to the data.We would like to thank Ander Perez, Vincenzo Quadrini, Ansgar Rannenberg, Serhiy Stepanchuk, Jaume Ventura, and several seminar participants for their comments. Financial support from the ERC Advanced Grant #269573 is gratefully acknowledged.

Financial constraints in search equilibrium: Mortensen Pissarides meet Holmstrom and Tirole

“…The proposition reconciles our theory with the work of Bacchetta et al (2016), who find a negative cross-sectional relationship between cash ratio and firm size.…”

“…We also include country and sector dummies as well as interactions between the two sets of dummies. As reported in Columns (1) and (2) in Table 1, the gearing ratio is negatively associated with plant-level employment change, while the Solvency Ratio is positively associated with employment changes. While these correlations are significant, leverage is clearly endogenous.…”

“…Hence changes in future income flows influence the borrowing constraint directly, not only indirectly as in Kiyotaki and Moore. 2 Our assumption is convenient within a search setting, as physical capital is downplayed in these models. Furthermore, in search models, a part of the investment is upfront investment in search capital, i.e.…”

“…He argues that firms that are not currently credit constrained may hoard cash for precautionary reasons. His model follows Jermann and Quadrini (2012) relatively closely, with the extension that firms can hold liquid assets and cash as in Bacchetta et al (2016). In periods in which the within-period borrowing constraint is tight, firms hoard cash and employ fewer workers.…”

The Effect of Firm Cash Holdings on Monetary Policy

“…A representative agent uses all money carried from the last period to buy and Palazzo (2012) study the real e¤ects of cash holdings on market share and equity returns. 6 A recent paper that studies the interaction of …rm cash holdings and macroeconomic variables is Bacchetta, Benhima, and Poilly (2014). 7 Cole and Ohanian do not con…rm major changes in the e¤ects of money shocks over the postwar period, as indicated with VARs.…”