The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID
Review of Corporate Finance Studies (Forthcoming)
54 Pages Posted: 8 Oct 2020
Date Written: October 3, 2020
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.
Keywords: COVID-19, credit lines, credit risk, cash holdings, fallen angels
JEL Classification: G01, G14, G32, G35
Suggested Citation: Suggested Citation