Credit risk spillovers and cash holdings |
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| Institution: | 1. University of Texas at El Paso, Economics and Finance Department, College of Business Administration, El Paso, TX 79968, USA;2. New Mexico State University, Department of Finance, College of Business, Las Cruces, NM 88003, USA;1. Bank for International Settlements, Switzerland;2. Banco de España, Spain;3. CEPR, United Kingdom;1. Anderson School of Management, University of New Mexico, Albuquerque, NM 87131, United States of America;2. Department of Finance, National Chengchi University, No.64, Sec.2, ZhiNan Rd., Wenshan District, Taipei City 11605, Taiwan;3. Department of Applied Economics and Management, National Ilan University, No.1, Sec. 1, Shennong Rd., Yilan City, Yilan County 260, Taiwan |
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| Abstract: | This paper examines how credit risk spillovers affect corporate financial flexibility. We construct separate empirical proxies to disentangle the two channels of credit risk spillovers—credit risk contagion (CRC), where one firm's default increases the distress likelihood of another; and product market rivalry (PMR), where the same default strengthens the position of a competitor. We show that firms facing greater CRC have weaker subsequent operating performance and must contend with less favorable bank loan terms. Meanwhile, they accumulate more cash by issuing equity, selling assets, and reducing investment and payout. In contrast, PMR generally has opposite, albeit weaker, effects. Our findings suggest that credit risk spillovers, especially CRC, play an important role in corporate liquidity management. |
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