Why Do Firms Hold Less Cash? A Customer Base Explanation
Recent empirical and anecdotal evidence suggest that U.S. firms hold a significant amount of cash on their balance sheets. Motivated by this observation, we seek to examine whether the firm's customer base, in particular the amount of sales transactions between a firm and the U.S. government affects the amount of its cash holdings. Building on numerous research streams in the literature to date, we predict and find that firms that have the U.S. government as a major customer hold fewer amounts of cash and have less volatile future earnings. In addition, our evidence suggests that the firm's suppliers take into account the relation between these firms and the U.S. government by providing less trade credit. To address any endogeneity concerns we use the 2000 presidential elections as an exogenous shock and our main findings continue to hold. Our focus on the U.S. government as a determinant of firm's cash holdings has not been addressed before in the literature and therefore advances our understanding why firms might hold less cash rather than more.