NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Sergei Davydenko

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April 2011Cash Holdings and Credit Risk
with Viral V. Acharya, Ilya A. Strebulaev: w16995
Intuition suggests that firms with higher cash holdings are safer and should have lower credit spreads. Yet empirically, the correlation between cash and spreads is robustly positive and higher for lower credit ratings. This puzzling finding can be explained by the precautionary motive for saving cash. In our model endogenously determined optimal cash reserves are positively related to credit risk, resulting in a positive correlation between cash and spreads. In contrast, spreads are negatively related to the "exogenous'' component of cash holdings that is independent of credit risk factors. Similarly, although firms with higher cash reserves are less likely to default over short horizons, endogenously determined liquidity may be related positively to the longer-term probability of default...

Published: “Cash Holdings and Credit Risk” with Sergei Davydenko and Ilya Strebulaev , 2012, Review of Financial Studies , 25(12), 3572 - 3609

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers only

 
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