Managerial Cash Use, Default, and Corporate Financial Policies

Posted: 31 May 2012 Last revised: 24 Jun 2014

See all articles by Marc Arnold

Marc Arnold

University of St. Gallen - School of Finance

Date Written: June 18, 2014

Abstract

This article investigates the impact of the observation that managers can use cash to defer bankruptcy on default risk and corporate financial policies. I show that with managerial cash use to defer default, the impact of cash on default risk depends on two opposing channels. While cash provides managers with a buffer against bankruptcy during difficult times, it also reduces equityholders’ willingness to contribute funds to the firm, which increases bankruptcy risk. The total impact of cash on default risk is driven by firm and industry characteristics that affect the relative importance of these two channels. As managers’ propensity for excess cash holdings depends on this total impact, the model explains observed excess cash levels, their determinants, and a wide range of empirical regularities of corporate cash holdings properties.

Keywords: Cash holdings, default risk, managerial control

JEL Classification: G32, G33

Suggested Citation

Arnold, Marc, Managerial Cash Use, Default, and Corporate Financial Policies (June 18, 2014). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2070663 or http://dx.doi.org/10.2139/ssrn.2070663

Marc Arnold (Contact Author)

University of St. Gallen - School of Finance ( email )

Unterer Graben 21
St.Gallen, CH-9000
Switzerland

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