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Cash Holdings and Credit Risk


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Sergei A. Davydenko


University of Toronto - Finance Area

Ilya A. Strebulaev


Stanford University - Graduate School of Business; National Bureau of Economic Research

August 1, 2012

Western Finance Association 2008 Meetings Paper
Rock Center for Corporate Governance at Stanford University Working Paper No. 123

Abstract:     
Intuition suggests that firms with higher cash holdings should be 'safer' and have lower credit spreads. Yet empirically, the correlation between cash and spreads is robustly positive. This puzzling finding can be explained by the precautionary motive for saving cash, which in our model causes riskier firms to accumulate higher cash reserves. In contrast, spreads are negatively related to the part of cash holdings that is not determined by credit risk factors. Similarly, although firms with higher cash reserves are less likely to default in the short term, 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.

Number of Pages in PDF File: 46

Keywords: Credit spreads, Default, Liquidity, Precautionary savings

JEL Classification: G32, G33

working papers series


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Date posted: March 22, 2007 ; Last revised: August 20, 2012

Suggested Citation

Acharya, Viral V. and Davydenko, Sergei A. and Strebulaev, Ilya A., Cash Holdings and Credit Risk (August 1, 2012). Western Finance Association 2008 Meetings Paper; Rock Center for Corporate Governance at Stanford University Working Paper No. 123. Available at SSRN: http://ssrn.com/abstract=972508 or http://dx.doi.org/10.2139/ssrn.972508

Contact Information

Viral V. Acharya
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Sergei A. Davydenko (Contact Author)
University of Toronto - Finance Area ( email )
Toronto, Ontario M5S 3E6
Canada
Ilya A. Strebulaev
Stanford University - Graduate School of Business ( email )
655 Knight Way
Stanford, CA 94305-5015
United States
HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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