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The Influence of a Credit Rating Change on Corporate Cash Holdings and Their Marginal Value


  • The authors are grateful to Robert Van Ness, the editor, and two anonymous reviewers, whose comments and suggestions have significantly improved the paper. We also thank Kristine Hankins, Gary Emery, participants at the Financial Management Association 2010 conference, and participants at the University of Southern Indiana College of Business Research Colloquium for their insightful comments.

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We examine the influence of credit rating changes on corporate excess cash holdings. We find that downgraded firms increase excess cash holdings by approximately 3% of total noncash assets, compared to a matched sample of firms without a rating change. We largely observe no significant cash policy change following upgrades. While our findings support existing studies on the value of precautionary cash hoarding in the face of increased financial constraint, we find hoarding is value-decreasing for shareholders. The marginal value of excess cash declines by at least 40% for downgraded firms and much more so when firms have histories of excess cash hoarding.