Working Paper: NBER ID: w27601
Authors: Viral V. Acharya; Sascha Steffen
Abstract: Data on firm-loan-level daily credit line drawdowns in the United States expose a corporate “dash for cash” induced by the COVID-19 pandemic. In the first phase of the crisis, which was characterized by extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase, which followed the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings.
Keywords: COVID-19; Corporate Finance; Cash Holdings; Credit Risk; Fallen Angels
JEL Codes: G01; G14; G32; G35
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| heightened credit risk (G21) | precautionary cash hoarding behavior (D14) |
| Fed's monetary interventions (E52) | stabilizing effect on higher-rated firms' cash management (G32) |
| initial dash for cash (E41) | increased utilization of credit lines by low-quality BBB-rated firms (G32) |
| credit risk (G21) | reliance on credit lines (G21) |
| COVID-19 pandemic (H12) | increase in cash holdings among riskier BBB-rated and non-investment grade firms (G32) |