Managing Liquidity in Production Networks: The Role of Central Firms
Review of Finance, Forthcoming
60 Pages Posted: 21 Aug 2014 Last revised: 28 Sep 2020
Date Written: September 8, 2020
Firms in the U.S. economy are closely interconnected in a production network and are subject to shocks that propagate within the network. This study examines the liquidity management of firms centrally connected in the network. I show that, while central firms are more exposed to aggregate swings, they maintain higher cash holdings to protect themselves and connected firms against such exposure. Central firms’ cash holding motives are alleviated by firm diversification but are aggravated by industry competition. Such motives are not explained by alternative determinants of cash policies. My findings suggest that systematically important firms proactively dampen the propagation of shocks in the production network.
Keywords: Production Networks, Financial Policies, Corporate Liquidity, Trade Credit
JEL Classification: G32, G33, L14
Suggested Citation: Suggested Citation