Cash holdings and credit risk
By: Viral V. Acharya, Sergei A. Davydenko, Ilya A. Strebulaev
Contributors: Davydenko, Sergei A.; Strebulaev, Ilya A.; National Bureau of Economic Research
Series: NBER working paper series -- working paper 16995; Working paper series (National Bureau of Economic Research : Online) -- working paper no. 16995.
Publisher: National Bureau of Economic Research
Published: 2011
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "Intuition suggests that firms with higher cash holdings are safer and should have lower credit spreads.  Yet empirically, the correlation between cash and spreads is robustly positive and higher for lower credit ratings.  This puzzling finding can be explained by the precautionary motive for saving cash.  In our model endogenously determined optimal cash reserves are positively related to credit risk, resulting in a positive correlation between cash and spreads.  In contrast, spreads are negatively related to the "exogenous'' component of cash holdings that is independent of credit risk factors.  Similarly, although firms with higher cash reserves are less likely to default over short horizons, endogenously determined liquidity may be related positively to the longer-term probability of default.  Our empirical analysis confirms these predictions, suggesting that precautionary savings are central to understanding the effects of cash on credit risk"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 7/7/2011.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.