Credit Risk Spillovers and Cash Holdings
52 Pages Posted: 19 Mar 2018 Last revised: 27 Jan 2020
Date Written: March 15, 2018
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: Suggested Citation