Corporate liquidity in Italy and its increase in the long recession

In this paper we analyse the evolution over time and the determinants of corporate liquidity in Italy, for which the empirical literature is still scant. Using a very large sample of firms for the period 2002-15 (about 460,000 firms per year on average), we document a substantial increase in cash holdings since 2011. We show that the rise in the cash ratio is mainly related to macro factors common to all firms. Among these macro factors, a strong correlation emerges with the lower opportunity cost of holding cash, as measured by the interest rate decline. We also assess the role of cash determinants at the firm level, relating them to different motives for holding cash, such as precautionary reasons, transaction costs, and the effects of information asymmetries in financial markets. Among firm-specific factors, the liquidity rise was initially linked primarily to the fall in investment and then to improved cash flows and enhanced deleveraging.