Hostname: page-component-76fb5796d-5g6vh Total loading time: 0 Render date: 2024-04-26T15:57:15.769Z Has data issue: false hasContentIssue false
  • English
  • Français

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 Universityjunjiexia@nsd.pku.edu.cn
*
qisun2013@gmail.com (corresponding author)
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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).

References

Acharya, V. V.; Almeida, H.; and Campello, M.. “Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies.” Journal of Financial Intermediation, 16 (2007), 515–554.CrossRefGoogle Scholar
Acharya, V. V.; Almeida, H.; and Campello, M.. “Aggregate Risk and the Choice between Cash and Lines of Credit.” Journal of Finance, 68 (2013), 2059–2116.CrossRefGoogle Scholar
Almeida, H.; Campello, M.; and Hackbarth, D.. “Liquidity Mergers.” Journal of Financial Economics, 102 (2011), 526–558.CrossRefGoogle Scholar
Altnklç, O., and Hansen, R. S.. “Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs.” Review of Financial Studies, 13 (2000), 191–218.CrossRefGoogle Scholar
Berrospide, J. M., and Meisenzahl, R. R.. “The Real Effects of Credit Line Drawdowns.” Working Paper, Board of Governors of the Federal Reserve System (2015).CrossRefGoogle Scholar
Boileau, M., and Moyen, N.. “Corporate Cash Holdings and Credit Line Usage.” International Economic Review, 57 (2016), 1481–1506.CrossRefGoogle Scholar
Bolton, P.; Chen, H.; and Wang, N.. “A Unified Theory of Tobin’s q, Corporate Investment, Financing, and Risk Management.” Journal of Finance, 66 (2011), 1545–1578.CrossRefGoogle Scholar
Bolton, P.; Chen, H.; and Wang, N.. “Market Timing, Investment, and Risk Management.” Journal of Financial Economics, 109 (2013), 40–62.CrossRefGoogle Scholar
Chaderina, M. “The Pre-Borrowing Motive: A Model of Coexistent Debt and Cash Holdings.” Working Paper, University of Oregon (2013).Google Scholar
Cooley, T. F., and Quadrini, V.. “Financial Markets and Firm Dynamics.” American Economic Review, 91 (2001), 1286–1310.CrossRefGoogle Scholar
DeAngelo, H.; DeAngelo, L.; and Whited, T. M.. “Capital Structure Dynamics and Transitory Debt.” Journal of Financial Economics, 99 (2011), 235–261.CrossRefGoogle Scholar
Denis, D. J., and McKeon, S. B.. “Debt Financing and Financial Flexibility: Evidence from Proactive Leverage Increases.” Review of Financial Studies, 25 (2012), 1897–1929.CrossRefGoogle Scholar
Duchin, R.; Ozbas, O.; and Sensoy, B. A.. “Costly External Finance, Corporate Investment, and the Subprime Mortgage Credit Crisis.” Journal of Financial Economics, 97 (2010), 418–435.CrossRefGoogle Scholar
Eisfeldt, A. L., and Muir, T.. “Aggregate External Financing and Savings Waves.” Journal of Monetary Economics, 84 (2016), 116–133.CrossRefGoogle Scholar
Gamba, A., and Triantis, A.. “The Value of Financial Flexibility.” Journal of Finance, 63 (2008), 2263–2296.CrossRefGoogle Scholar
Gilchrist, S.; Sim, J. W.; and Zakrajšek, E.. “Uncertainty, Financial Frictions, and Investment Dynamics.” NBER Working Paper No. 20038 (2014).CrossRefGoogle Scholar
Gomes, J. F. “Financing Investment.” American Economic Review, 91 (2001), 1263–1285.CrossRefGoogle Scholar
Gourio, F., and Michaux, M.. “Financing Investment with Long-Term Debt and Uncertainty Shocks.” Working Paper, University of Southern California (2012).Google Scholar
Hackbarth, D., and Mauer, D. C.. “Optimal Priority Structure, Capital Structure, and Investment.” Review of Financial Studies, 25 (2012), 747–796.CrossRefGoogle Scholar
Harford, J.; Klasa, S.; and Maxwell, W. F.. “Refinancing Risk and Cash Holdings.” Journal of Finance, 69 (2014), 975–1012.CrossRefGoogle Scholar
Hennessy, C. A., and Whited, T. M.. “Debt Dynamics.” Journal of Finance, 60 (2005), 1129–1165.CrossRefGoogle Scholar
Hennessy, C. A., and Whited, T. M.. “How Costly Is External Financing? Evidence from a Structural Estimation.” Journal of Finance, 62 (2007), 1705–1745.CrossRefGoogle Scholar
Holmström, B., and Tirole, J.. “Private and Public Supply of Liquidity.” Journal of Political Economy, 106 (1998), 1–40.CrossRefGoogle Scholar
Hugonnier, J.; Malamud, S.; and Morellec, E.. “Capital Supply Uncertainty, Cash Holdings, and Investment.” Review of Financial Studies, 28 (2015), 391–445.CrossRefGoogle Scholar
Ippolito, F., and Orive, A. Pérez. “Credit Lines: The Other Side of Corporate Liquidity.” Paper Presentation, Midwest Finance Association 2012 Annual Meetings (2012).CrossRefGoogle Scholar
Ivashina, V., and Scharfstein, D.. “Liquidity Management in the Financial Crisis.” Working Paper, Harvard Business School (2009).Google Scholar
Jermann, U. J., and Quadrini, V.. “Macroeconomic Effects of Financial Shocks.” American Economic Review, 102 (2012), 238–271.CrossRefGoogle Scholar
Jermann, U. J. “Asset Pricing in Production Economies.” Journal of Monetary Economics, 41 (1998), 257–275.CrossRefGoogle Scholar
Kiyotaki, N., and Moore, J.. “Credit Cycles.” Journal of Political Economy, 105 (1997), 211–248.CrossRefGoogle Scholar
Leland, H. E., and Toft, K. B.. “Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads.” Journal of Finance, 51 (1996), 987–1019.CrossRefGoogle Scholar
Moyen, N. “Investment–Cash Flow Sensitivities: Constrained versus Unconstrained Firms.” Journal of Finance, 59 (2004), 2061–2092.CrossRefGoogle Scholar
Nikolov, B., and Whited, T. M.. “Agency Conflicts and Cash: Estimates from a Dynamic Model.” Journal of Finance, 69 (2014), 1883–1921.CrossRefGoogle Scholar
Rampini, A. A., and Viswanathan, S.. “Collateral, Risk Management, and the Distribution of Debt Capacity.” Journal of Finance, 65 (2010), 2293–2322.CrossRefGoogle Scholar
Sufi, A. “Bank Lines of Credit in Corporate Finance: An Empirical Analysis.” Review of Financial Studies, 22 (2009), 1057–1088.CrossRefGoogle Scholar
Warusawitharana, M., and Whited, T. M.. “Equity Market Misvaluation, Financing, and Investment.” Review of Financial Studies, 29 (2016), 603–654.Google Scholar
Yun, H. “The Choice of Corporate Liquidity and Corporate Governance.” Review of Financial Studies, 22 (2009), 1447–1475.CrossRefGoogle Scholar
Zhang, L. “The Value Premium.” Journal of Finance, 60 (2005), 67–103.CrossRefGoogle Scholar
Supplementary material: PDF

Sun and Xia supplementary material

Sun and Xia supplementary material

Download Sun and Xia supplementary material(PDF)
PDF 544.4 KB