55 Pages Posted: 18 Apr 2011 Last revised: 31 May 2013
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: 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: https://ssrn.com/abstract=1810199 or http://dx.doi.org/10.2139/ssrn.1810199
By Amir Sufi