Cash Reserves as a Hedge Against Supply-Chain Risk

This paper investigates reduced inventory holdings as a factor in the observed increase in firms’ average cash holdings. Supply chain disruption costs are considered as a channel through which optimal inventory affects cash. We find evidence consistent with large plausibly exogenous reductions in inventory, due to trucking industry deregulation and significantly lowered transportation costs, causing increased cash holdings. We also find that firms facing higher expected costs of disruptions generally save more cash from capital freed-up via supply chain management innovations. We document significant post-disruption declines in cash holdings consistent with cash as a primary source of financing during disruptions.