Effects of the 2008 Financial Crisis on the Working Capital Management Policy of U.S. Enterprises

Headnote

Abstract

The literature has not extensively examined the effects of the 2008 financial crisis on the working capital management of U.S. enterprises. That economic turmoil may have caused enterprises to encounter a lack of funds owing to the severe credit crunch, financial constraints, poor liquidity, and other factors, thereby adversely affecting their working capital management policies. This study thus investigates the effects of this global crisis on the working capital management policy of U.S. enterprises using panel data regression with fixed effects. Results reveal no significant effect on the cash conversion cycle (CCC), implying that a financial crisis has no effect on the speed of working capital collection. However, firms with relatively low current and quick ratios during and after a financial crisis period should pay more attention to their liquidity management strategies or take actions prior to the eruption of a crisis so as to prevent themselves from slipping into a liquidity crisis that in turn weakens their financial situation and leads to financial difficulties.

Keywords: working capital management policy; financial crisis; liquidity management policy

JEL classifications: G30; G32; G01

1.Introduction

Did the 2008 financial crisis affect the working capital management policy of U.S. enterprises? On Nov. 2, 2009, the Wall Street Journal suggested that cash holdings during the financial crisis were significantly higher than those at any time in the past 40 years, as evidenced by the highest cash to assets ratio(for 500 largest nonfinancial U.S. companies). The bankruptcy of Lehman Brothers in September 2008 resulted in a global credit crunch. With the spread of the economic collapse throughout the world, the global unemployment rate significantly increased. Many studies investigate and advocate the importance of liquidity management strategies for a firm during a financial crisis (Tong and Wei, 2008; Ivashina and Scharfstein, 2010; Duchin et al., 2010; Campello et al., 2010; Campello et al., 2011; Shirasu, 2012; Maksimovic et al., 2015; Haron and Nomran, 2016; Nia and Mansoori, 2016; Raykov, 2017a, 2017b; Oseifuah, 2018; Tsuruta, 2019). Ivashina and Scharfstein (2010) assert that banks sharply slashed credits for new loans and were unwilling to offer new loans during the financial crisis; hence, market liquidity and economic activities were significantly curtailed at that time. Some countries (such as Greece, Iceland, Italy, Ireland, Portugal, and...