Cash Holdings and Access to External Finance: Evidence from the Bank Loan Market

Adelina Barbalau, Mark R. Huson and Lukas Roth

Review of Corporate Finance, 2022, vol. 2, issue 1, 65-97

Abstract: Using a large sample of bank loans obtained by U.S. firms, we examine the relation between cash holdings and access to external finance via bank loans. We document a negative relation between cash holdings and loan spreads. This negative relation is confirmed in a subsample of quasi-exogenous loan issuances associated with covenant violations and is stronger for higher risk and financially constrained firms. We also find that restrictions to aggregate credit supply have a smaller impact on the cost of funds at high-cash firms, and loans to high-cash firms have fewer restrictive covenants. All else equal, high-cash firms are less financially constrained not only because they have cash to draw down, but also because cash facilitates accessing external capital from banks.

Keywords: Cash holdings; bank loans; yield spread; covenants; financial constraints (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlrcf:114.00000013

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