Impacts of COVID-19 pandemic on corporate cash holdings: Evidence from Korea

• Published in: Emerging markets review 2023-09, Vol.56, p.101055, Article 101055
• Main Authors: Chung, Hae Jin, Jhang, Hogyu, Ryu, Doojin
• Format: Article
• Language: English
• Subjects: Cash holdings; Cash management; COVID-19; Precautionary motive; Quantitative easing
• ISSN: 1566-0141; 1873-6173
• DOI: 10.1016/j.ememar.2023.101055

We examine how corporate cash management in Korea has evolved during the COVID-19 crisis, focusing on the interaction between COVID-19-related uncertainty and financing frictions. Compared with the 2008 global financial crisis, massive expansionary financial policy measures have resulted in low external financing costs shortly after the early negative shocks to external financing. This provides a unique opportunity to investigate the separate effects of uncertainty and financing frictions on corporate cash holdings. Consistent with the precautionary motive for cash holdings, we find that firms reserve more cash in 2020 in response to the increased uncertainty; this is especially the case if they are negatively affected by the COVID-19 crisis and financially constrained. However, unaffected firms with better access to financial markets and internal capital markets also increase their cash holdings. The COVID-19 pandemic does not systematically change corporate cash management policies. In 2021, firms decrease their cash holdings as uncertainty declines. Overall, our evidence implies that uncertainty is the primary determinant of corporate cash management decisions, whereas financing frictions play a secondary role. We discuss the policy implications of the amplified inequality between financially constrained and unconstrained firms resulting from massive expansionary financial policy measures. •COVID-19 uncertainty is the primary determinant of cash management.•Expansionary financial policies mitigate uncertainty's effect.•Financially constrained firms reserve cash to cope with uncertainty.•Among firms not suffering from the COVID-19 crisis, unconstrained firms hoard cash.•Expansionary policies widen the inequality among constrained and unconstrained firms.