Corporate risk and financial asset holdings

Xiaodong Xu, Yayu Mu and Juan Wang

Pacific-Basin Finance Journal, 2023, vol. 81, issue C

Abstract: We investigate the impact of corporate risk on financial asset holdings in China from 2007 to 2020. This study constructs a more precise measurement of financial assets than prior studies, and employs a new textual measure of comprehensive firm risk. Our results show that firms with higher risks hold more financial assets, especially more short-term financial assets, to enhance liquidity and financial performance. In the cross-sectional analyses, we find that the positive relation between risk and financial asset holdings is more pronounced when firms face greater financial constraints, have weaker corporate governance, and have poorer growth prospects. We further find that financial asset holdings alleviate (worsen) the negative impact of risk on firms' real investments in capital expenditures (R&D investments). These results suggest that in the impact of risk on capital expenditures (R&D investments), the positive (negative) role of financial assets in improving liquidity and financial performance (worsening uncertainty and crowding out real investments) appears to be dominant. Lastly, we break down a firm's comprehensive risk into four distinct risk subcategories: financial risk, litigation risk, systematic risk, and idiosyncratic risk. We find that firms tend to increase their holdings of financial assets in response to higher financial and litigation risks. Our novel evidence suggests that firms' higher risks lead to more investments in financial assets, which in turn affect the negative impact of risk on firms' real investments. Overall, our findings highlight the importance of financial assets as a unique risk management instrument.

Keywords: Risk; Financial asset holdings; Real investments; Capital expenditure; Research and development investments (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:81:y:2023:i:c:s0927538x23001920

DOI: 10.1016/j.pacfin.2023.102121

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