Corporate liquidity in Italy and its increase in the long recession

We analyse the evolution over time and the determinants of corporate liquidity in Italy for the period 2002-2015 using a very large sample of firms (about 460 thousands per year on average) and including many that are small and unlisted. We document a substantial increase in cash holdings since 2011. This rise is shown to be 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.