According to the real investment motive, high stock liquidity generates this complementarity between external financing and cash holdings.
Therefore, corporate cash holdings increase with stock liquidity..
Meaning of cash holdings in English
money that a person or company keeps available to spend rather than investing: low/high cash holdings Low cash holdings take away the freedom of managers to react to the market..
Meaning of cash holdings in English
money that a person or company keeps available to spend rather than investing: low/high cash holdings Low cash holdings take away the freedom of managers to react to the market. (Definition of cash holdings from the Cambridge Business English Dictionary \xa9 Cambridge University Press).
The principal sources of credit risk within the Group arise from loans and advances, contingent liabilities, commitments, debt securities and derivatives to customers, financial institutions and sovereigns..
Intuition suggests that firms with higher cash holdings should be “safer” and have lower credit spreads.
Yet empirically, the correlation between cash and spreads is robustly positive.
This puzzling finding can be explained by the precautionary motive for saving cash, which in our model causes riskier firms to accumulate higher cash reserves.
At the same time, it can also increase the credit risk of other firms in the same industry, leading to an increase of the firm's credit risk contagion (CRC) exposure.
Under this scenario, wecannot conclude that it is credit risk contagion that increases the firm's cash holdings.
Credit risk spillovers and cash holdings:
This puzzling finding can be explained by the precautionary motive for saving cash, which in our model causes riskier firms to accumulate higher cash reserves.
In contrast, spreads are negatively related to the part of cash holdings that is not determined by credit risk factors.
