TY  - JOUR
AU  - Acharya,Viral V.
AU  - Davydenko,Sergei A.
AU  - Strebulaev,Ilya A.
TI  - Cash Holdings and Credit Risk
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 16995
PY  - 2011
Y2  - April 2011
UR  - http://www.nber.org/papers/w16995
L1  - http://www.nber.org/papers/w16995.pdf
N1  - Author contact info:
Viral V. Acharya
Stern School of Business
New York University
44 West 4th Street, Suite 9-84
New York, NY 10012
Tel: 212/998-0354
Fax: 212 995 4233
E-Mail: vacharya@stern.nyu.edu

Sergei Davydenko
Assistant Professor of Finance
Rotman School of Management
University of Toronto
105 St George Street, Toronto
Canada M5S 3E6	
Tel: 44 207 262 5050 ext 3768
Fax: 44 207 724 3317
E-Mail: davydenko@rotman.utoronto.ca

Ilya A. Strebulaev
Graduate School of Business
Stanford University
655 Knight Way
Stanford, CA 94305
Tel: 650/725-8239
Fax: 650/725-7979
E-Mail: istrebulaev@stanford.edu
AB  - 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.
ER  -