Abstract
We examine the effects of firms’ cash positions in moderating the impact of the subprime mortgage crisis on corporate performance. We find that corporate performance significantly declines following the onset of the crisis. Firms with low cash reserves had the largest declines in performance following the onset of the financial crisis. However, we do not find any differences in performance decline following the onset of the crisis, when we compare financially constrained firms to financially unconstrained firms.
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Appendix
Appendix
Variable definitions
Abbreviations in parentheses denote Compustat item names.
\( {\text{Cash}} = {\text{Cash }}\left( {\text{che}} \right)/{\text{total assets }}\left( {\text{at}} \right) \)
\( {\text{Short}} - {\text{term debt}} = {\text{Debt in current liabilities }}\left( {\text{dlc}} \right)/{\text{total assets }}\left( {\text{at}} \right) \)
\( {\text{Long}} - {\text{term debt}} = {\text{Long}} - {\text{term debt }}\left( {\text{dltt}} \right)/{\text{total assets }}\left( {\text{at}} \right) \)
\( {\text{Debt ratio}} = \left( {{\text{Long}} - {\text{term debt }}\left( {\text{dltt}} \right) + {\text{Short}} - {\text{term debt }}\left( {\text{dlc}} \right)} \right)/{\text{total assets }}\left( {\text{at}} \right) \)
\( {\text{Tobin}}\prime{\text{s}}\;Q = {\text{Market value of assets }}\left( {{\text{total assets }}\left( {\text{at}} \right) + {\text{market value of common equity }}\left( {{\text{csho}}*{\text{prcc}}} \right){ }-{\text{ common equity }}\left( {\text{ceq}} \right)-{\text{deferred taxes }}\left( {\text{txdb}} \right)} \right)/\left( {0.{9}*{\text{book value of assets }}\left( {\text{at}} \right) + 0.{1}*{\text{market value of assets}}} \right) \), computed as in Kaplan and Zingales (1997).
\( {\text{Payout ratio}} = \left( {{\text{Cash dividends }}\left( {\text{dv}} \right) + {\text{repurchases }}\left( {\text{prstkc}} \right)} \right)/{\text{income before extraordinary items }}\left( {\text{ib}} \right) \).
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Adjei, F. The effects of cash holdings on corporate performance during a credit crunch: evidence from the sub-prime mortgage crisis. J Econ Finan 37, 188–199 (2013). https://doi.org/10.1007/s12197-011-9177-8
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DOI: https://doi.org/10.1007/s12197-011-9177-8