Credit Risk Spillovers and Cash Holdings

64 Pages Posted: 19 Mar 2018 Last revised: 25 Apr 2021

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. We construct separate empirical proxies to disentangle the two channels of credit risk spillovers—credit risk contagion (CRC), where one firm's default increases the distress likelihood of another; and product market rivalry (PMR), where the same default strengthens the position of a competitor. We show that firms facing greater CRC have weaker subsequent operating performance and must contend with less favorable bank loan terms. Meanwhile, they accumulate more cash by issuing equity, selling assets, and reducing investment and payout. 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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