Refinancing Risk and Cash Holdings

55 Pages Posted: 18 Apr 2011 Last revised: 31 May 2013

See all articles by Jarrad Harford

Jarrad Harford

University of Washington; European Corporate Governance Institute (ECGI)

Sandy Klasa

University of Arizona - Department of Finance

William F. Maxwell

Southern Methodist University (SMU) - Finance Department

Date Written: May 30, 2013


We find that to mitigate refinancing risk caused by shorter maturity debt, firms increase their cash holdings and save more cash from their cash flows. We also document that the maturity of U.S. firms’ long-term debt has markedly shortened over the 1980-2008 period and that this shortening explains a large fraction of the documented increase in the cash holdings of U.S. firms over time. Consistent with the inference that cash reserves are particularly valuable for firms with shorter maturity debt, we document that the market value of a dollar of cash is higher for such firms and that larger cash reserves help to mitigate underinvestment problems resulting from refinancing risk. Also, we find that our results are more pronounced during periods when credit market conditions are less strong and refinancing risk is consequently higher. Overall, our findings imply that refinancing risk is a key determinant of corporate cash holdings and they provide insights on the interdependence of a firm’s financial policy decisions.

Keywords: Cash Holdings, Refinancing Risk, Debt Maturity

JEL Classification: G31, G32, G33

Suggested Citation

Harford, Jarrad and Klasa, Sandy and Maxwell, William F., Refinancing Risk and Cash Holdings (May 30, 2013). Journal of Finance, Forthcoming, Available at SSRN: or

Jarrad Harford

University of Washington ( email )

Box 353226
Seattle, WA 98195-3226
United States
206-543-4796 (Phone)
206-543-7472 (Fax)


European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Sandy Klasa (Contact Author)

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
520-621-8761 (Phone)

William F. Maxwell

Southern Methodist University (SMU) - Finance Department ( email )

United States

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