Financial constraints and the value of cash during and after the financial crisis of 2008

Abstract

This thesis studies the impacts of the financial crisis of 2008 and its aftermath to the marginal value of cash for shareholders in the United States. The tests are conducted with the methodology of Faulkender & Wang (2006) with a total sample of 2679 firms and 25720 firm-years. This study adds to earlier literature by showing that the shareholders of an average firm value extra cash higher during the financial crisis due to more restricted access to debt, lower expectations of future income, increase in short-term debt and decrease in new equity issuance. After the crisis, the value of cash has since decreased below the levels of the pre-crisis period. I also find, that the cash is valued lower for constrained firms during the crisis due to lower investment activity and relatively higher debt and interest expenses. Unconstrained firms do not face similar changes and their cash is valued higher during the crisis period. The findings imply that these results for constrained and unconstrained firms are only temporary due to the crisis, as after the crisis the differences in value of cash between constrained and unconstrained firms present similar results with the earlier literature.