NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

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: EmailAddress: hidden: you can email any NBER-related person as first underscore last at nber dot org

NBER Working Papers and Publications

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

 
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