Bank Soundness and Cash Holdings: Evidence from a Bank-Centered Financial Market
40 Pages Posted: 20 Aug 2016 Last revised: 13 Nov 2017
Date Written: September 22, 2017
We examine how banks affect firms’ cash holdings by focusing on the soundness of banks in Japan, a bank-centered market, and we find that the deterioration of a banks’ soundness leads firms to save more cash from their cash flows. The deterioration of bank soundness decreases bank-dependent firm investment and firm value. Cash holdings of bank-dependent firms mitigate underinvestment problems and increase firm value. These effects are statistically and economically significant. These results, which are consistent with the financial constraint hypothesis and are inconsistent with the bank power hypothesis, imply that bank soundness renders firms financially constrained and affects firms’ cash holdings, investments and valuations in a bank-centered market.
Keywords: Cash holdings; Bank soundness; Cash-flow sensitivity of cash; Financial constraint; Bank power
JEL Classification: G21, G32
Suggested Citation: Suggested Citation