Credit Risk Spillovers and Cash Holdings

53 Pages Posted: 19 Mar 2018 Last revised: 2 Aug 2018

See all articles by Jin Lei

Jin Lei

Brock University - Goodman School of Business

Jiaping Qiu

McMaster University - Michael G. DeGroote School of Business

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance

Date Written: March 15, 2018

Abstract

This paper examines how credit risk spillovers affect corporate financial flexibility and bank loan contracting. We construct separate empirical proxies to disentangle the two channels of credit risk spillovers--credit risk contagion (CRC), which increases industry peers’ distress likelihood; and product market rivalry (PMR), which strengthens rivals’ competitive position. We show that firms facing greater CRC hold more cash, make lower payouts, and must contend with less favorable bank loan terms. In contrast, PMR generally has opposite, albeit weaker, effects. Our findings suggest that credit risk spillovers, especially CRC, play an important role in corporate liquidity management.

Keywords: credit risk contagion; product market rivalry; financial distress; cash holdings; payout ratio; bank loan contracting

JEL Classification: G21; G32; G33

Suggested Citation

Lei, Jin and Qiu, Jiaping and Wan, Chi and Yu, Fan, Credit Risk Spillovers and Cash Holdings (March 15, 2018). Claremont McKenna College Robert Day School of Economics and Finance Research Paper No. 3140958. Available at SSRN: https://ssrn.com/abstract=3140958 or http://dx.doi.org/10.2139/ssrn.3140958

Jin Lei

Brock University - Goodman School of Business ( email )

500 Glenridge Avenue
St. Catharines, Ontario L2S3A1
Canada

Jiaping Qiu (Contact Author)

McMaster University - Michael G. DeGroote School of Business ( email )

1280 Main Street West
Hamilton, Ontario L8S 4M4
Canada

Chi Wan

University of Massachusetts Boston - Department of Accounting and Finance ( email )

Boston, MA 02125
United States

Fan Yu

Claremont McKenna College - Robert Day School of Economics and Finance ( email )

500 E. Ninth St.
Claremont, CA 91711-6420
United States
(909)607-3345 (Phone)

HOME PAGE: http://www.cmc.edu/academic/faculty/profile.asp?Fac=553

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