Corporate Cash Policy under Financial Constraints: Evidence from the Temporary Funds Adjustment Act

2025・06

要約

Farre-Mensa and Ljungqvist (2016) argue that the measures of financial constraints used in existing studies do not effectively capture true constraints. To more clearly demonstrate the relationship between firms’ financial constraints and their financial behavior without relying on such measures, we use Japan’s Temporary Funds Adjustment Act, enacted in September 1937, to examine how financially constrained firms respond through financial actions to defend themselves. Our analysis reveals the following key findings. First, firms affected by the act increased their cash holdings after its enforcement, compared to those not impacted. Second, these constrained firms responded to the increased cash holdings by raising their short-term borrowings and retained earnings, thereby avoiding reliance on long-term loans. Third, there was no evidence that direct investment declined even among financially constrained firms. These results are consistent with the precautionary motive for holding cash, and show that financial constraints amplify this motive.