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

37 Pages Posted: 16 Mar 2013 Last revised: 5 Jan 2021

See all articles by Mark R. Huson

Mark R. Huson

University of Alberta - Department of Finance and Statistical Analysis

Lukas Roth

University of Alberta - Department of Finance and Statistical Analysis; European Corporate Governance Institute (ECGI)

Date Written: November 4, 2020

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 sub-sample 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

JEL Classification: G21, G32

Suggested Citation

Huson, Mark R. and Roth, Lukas, Cash Holdings and Access to External Finance: Evidence from the Bank Loan Market (November 4, 2020). Available at SSRN: https://ssrn.com/abstract=2234166 or http://dx.doi.org/10.2139/ssrn.2234166

Mark R. Huson

University of Alberta - Department of Finance and Statistical Analysis ( email )

4-20C Business
University of Alberta
Edmonton, Alberta T6G 2R6
Canada
780-492-2803 (Phone)
780-492-3325 (Fax)

Lukas Roth (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32E Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-4431 (Phone)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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