Stock price reactions to corporate cash holdings in mitigating predictable and unpredictable negative shocks

• Published in: Pacific-Basin finance journal Vol. 79; p. 101997
• Main Authors: Aono, Kohei, Hori, Keiichi
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 01.06.2023
• Subjects: Cash holdings; Consumption tax hike; COVID-19; Event study; Financial constraint; COVID-19; Financial constraint; G32; Cash holdings; Event study; G14; Consumption tax hike
• ISSN: 0927-538X; 1879-0585
• DOI: 10.1016/j.pacfin.2023.101997

This paper explores how cash mitigates predictable and unpredictable adverse cash flow shocks to firms using the financial data of Japanese firms. We find that (i) cash had a positive impact on stock prices, and the impact was thoroughly reflected in stock prices before a predictable shock, (ii) after an unpredicted shock, the value of cash for the financially constrained firms is larger than that for the unconstrained firms, and (iii) the value of cash is similar between the two shocks for the unconstrained firms whereas the value is larger when the unpredicted shock occurs than when the predicted shock occurs for the constrained firms. •This paper investigates the role of cash in mitigating cash flow shocks for Japanese firms.•Results show that cash positively impacts stock prices, particularly before predictable shocks.•Financially constrained firms benefit more from cash reserves after unpredictable shocks, while unconstrained firms show consistent cash values across shocks.