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Cash Holdings, Capital Structure, and Financing Risk

Published online by Cambridge University Press:  05 January 2021

Qi Sun Open the ORCID record for Qi Sun [Opens in a new window]  and
Junjie Xia Open the ORCID record for Junjie Xia [Opens in a new window]
Qi Sun*
Affiliation:
Shanghai University of Finance and Economics, Shanghai Institute of International Finance and Economics
Junjie Xia
Affiliation:
Central University of Finance and Economics and Peking [email protected]
*
[email protected] (corresponding author)
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Abstract

This article quantifies a new motive of holding cash through the channel of financing risk. We show that if access to future credit is risky, firms may issue long-term debt now and save funds in cash to secure the current credit capacity for the future. We structurally estimate the model and find that this motive explains approximately 24% to 30% of cash holdings in the data. Counterfactual experiments indicate that the value of holding cash is approximately 8% of shareholder value.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 57 , Issue 2 , March 2022 , pp. 790 - 824
Copyright
© The Author(s), 2021. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We thank Harry DeAngelo, Dirk Hackbarth (the referee), Jarrad Harford (the editor), Bill Megginson, Michael Michaux, and Vincenzo Quadrini for many insightful comments and suggestions. We also thank Jose Berrospide for kindly sharing quarterly data on the availability of credit lines and Ander Perez for sharing the matched Compustat ID of firms in the Capital IQ database. The article was previously circulated by the title “Cash Holdings and Risky Access to Future Credit.” Sun acknowledges financial support from the National Natural Science Foundation of China (72072108).

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