Cash Holdings along the Supply Chain: The Downstream Evidence

We examine the downstream effect of cash holdings along the supply chain. Using a supplier-customer sample from 1989 to 2009, we find evidence that a supplier's large cash holdings increase its customers' demand for cash reserves, suggesting that the negative risk spillover effect dominates the positive trade credit effect from a supplier to its customers. This finding is robust to alternative specifications of Two-Stage Least Squares, and the positive downstream impact on cash holdings is amplified during the financial crisis. We also find that the effect is stronger under the condition of a more substantial risk spillover effect or a weaker trade-credit effect.