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Cash Reserves as a Hedge against Supply-Chain Risk

Published online by Cambridge University Press:  11 September 2017

Manoj Kulchania  and
Shawn Thomas
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Abstract

Deregulation of the trucking industry and significantly lowered transportation costs led to large, widespread, and plausibly exogenous reductions in inventory for U.S. firms, with consequent increased supply-chain disruption (SCD) costs. We find evidence that increased SCD costs help explain the puzzling long-term trend of increasing average U.S. firm cash holdings. We also find that firms facing higher expected costs of disruptions generally save more cash from capital freed up via supply-chain management innovations. Finally, we document significant postdisruption declines in cash holdings consistent with cash as a primary source of financing during disruptions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 52 , Issue 5 , October 2017 , pp. 1951 - 1988
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2017 

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Footnotes

1

We thank Kenneth Ahern, David Denis, Diane Denis, Jesse Ellis, Douglas Fairhurst, Laurent Fresard (the referee), Kimberly Gleason, Jarrad Harford (the editor), David Haushalter, Kathy Kahle, Andrew Koch, Sailu (Lulu) Li, Leming Lin, Jared Smith, Sid Syam, and seminar participants at Bentley, Georgia Tech, Marquette, Texas A&M, Pittsburgh, Wayne State, and the 2017 Midwest Finance Association Meeting for helpful comments and suggestions. We thank Majid Darvishan, Arup Ganguly, Qian Chen, Tian Qiu, Lei Qin, Nicole Seibel, and Yao Yu for helpful research assistance. A previous version of this article circulated with the title, “Supply Chain Disruption Costs and the Substitution of Cash for Inventory.” Any errors remain our own.

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