Journal of Financial and Quantitative Analysis

Research Articles

Long-Term Effects of a Financial Crisis: Evidence from Cash Holdings of East Asian Firms

Kyojik (Roy) Songa1 and Youngjoo Leea2

a1 Business School, Sungkyunkwan University, 53 Myoungnyun-dong 3-ga, Jongno-gu, Seoul 110-745, South Korea

a2 Business School, Sogang University, 35 Baekbeom-ro, Mapo-gu, Seoul 121-742, South Korea.


We investigate the long-term effect of the Asian financial crisis on corporate cash holdings in 8 East Asian countries. The Asian firms build up cash holdings by decreasing investment activities after the crisis. We find that the increase in cash holdings is not explained by changes in firm characteristics but by changes in the firms’ demand function for cash, which indicates that the crisis has systematically changed the firms’ cash-holding policies. Specifically, the firms’ increased sensitivity to cash flow volatility is one of the main factors explaining the higher level of their cash holdings in the postcrisis period.

(Online publication February 02 2012)


We thank an anonymous referee, J. B. Chay, Kee H. Chung, Kenneth A. Kim, Dong Wook Lee, Paul Malatesta (the editor), and seminar participants at Sungkyunkwan University, Korea University, 2007 Financial Management Association meetings, 2007 Australasian Finance and Banking Conference, and 2010 European Financial Management Association Asian Finance Symposium for their helpful comments. An earlier version of the paper was circulated under the title “Why Have East Asian Firms Increased Cash Holdings So Much After the Asian Financial Crisis? “ This paper was supported by the Faculty Research Fund at Sungkyunkwan University in 2010. All errors are our own.