Cash Holdings, Capital Structure, and Financing Risk

Qi Sun and Junjie Xia

This paper quantifies a new motive of holding cash through the channel of financing risk. We show that if the access to future credit is risky, firms may issue long-term debt now and save funds in cash to secure the current credit capacity for the future. We structurally estimate the model and find that this motive explains about 24% to 30% of cash holdings in the data. Counterfactual experiments indicate that the value of holding cash is around 8% of shareholder value.