Corporate precautionary savings: Evidence from the recent financial crisis

• We examine the impact of the recent liquidity crisis on corporate savings and corporate saving propensity.
• Firms save less (more) in the first (second) stage of the crisis relative to pre-crisis.
• Firms increase their saving propensity during the financial crisis.
• The effects are more pronounced in constrained firms and firms with high cash flow volatility.
• Our results provide further evidence on precautionary savings motive.

This paper examines the effects of the recent financial crisis on corporate cash holdings and saving propensities. We find that on average, firms reduce their cash holdings in the first year of the crisis when the supply of external finance is tightened, and increase their holdings in cash from the third quarter of 2008 when the demand-side effects of the crisis are stronger. More importantly, we find that the positive cash flow sensitivities of cash are significantly stronger during the financial crisis. This effect is more pronounced in financially constrained firms and firms with a high precautionary motive. Our results suggest that firms tended to save more as a precautionary motive during the recent financial crisis.