The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of Covid

54 Pages Posted: 4 Aug 2020 Last revised: 2 Dec 2021

See all articles by Viral V. Acharya

Viral V. Acharya

Professor; New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Sascha Steffen

Frankfurt School of Finance & Management

Multiple version iconThere are 4 versions of this paper

Date Written: July 2020

Abstract

Data on firm-loan-level daily credit line drawdowns in the United States expose a corporate “dash for cash” induced by the COVID-19 pandemic. In the first phase of the crisis, which was characterized by extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase, which followed the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings.

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Steffen, Sascha, The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of Covid (July 2020). Available at SSRN: https://ssrn.com/abstract=3665871

Viral V. Acharya (Contact Author)

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New York University - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance

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Sascha Steffen

Frankfurt School of Finance & Management ( email )

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