NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Cash Holdings and Credit Risk

Viral V. Acharya, Sergei A. Davydenko, Ilya A. Strebulaev

NBER Working Paper No. 16995
Issued in April 2011
NBER Program(s):   AP   CF

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. Our empirical analysis confirms these predictions, suggesting that precautionary savings are central to understanding the effects of cash on credit risk.

download in pdf format
   (681 K)

email paper

This paper is available as PDF (681 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w16995

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

Users who downloaded this paper also downloaded these:
Pinkowitz, Stulz, and Williamson w18120 Multinationals and the High Cash Holdings Puzzle
Gourio w17026 Credit Risk and Disaster Risk
Opler, Pinkowitz, Stulz, and Williamson w6234 The Determinants and Implications of Corporate Cash Holdings
Acharya, Almeida, and Campello w16122 Aggregate Risk and the Choice between Cash and Lines of Credit
Ang and Longstaff w16982 Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us