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Cash Reserves as a Hedge Against Supply-Chain Risk

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Document pages: 66 pages

Abstract: Deregulation of the trucking industry and significantly lowered transportation costs led to large, widespread, and plausibly exogenous reductions in inventory for U.S. firms, but with consequent increased supply chain disruption costs. We find evidence that increased supply chain disruption costs help explain the puzzling long-term trend of increasing average U.S. firm 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. Finally, we document significant post-disruption declines in cash holdings consistent with cash as a primary source of financing during disruptions.

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