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Refinancing Risk and Cash Holdings





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    • Harford is with the Foster School of Business, University of Washington, Klasa is with the Eller College of Management, University of Arizona, and Maxwell is with the Cox School of Business, Southern Methodist University. We thank an anonymous referee; an Associate Editor; Malcolm Baker; Travis Box; Murillo Campello; Lin Chen; Amar Gande; Cam Harvey (the Editor); Chris James; Kathy Kahle; Swaminathan Kalpathy; Hayong Yun; and seminar participants at Brigham Young University, McGill University, Texas Tech University, Virginia Tech University, the University of Arizona, a University of Oregon conference, a City University of Hong Kong symposium, and the University of Innsbruck Financial Markets and Risk conference for helpful comments. We also thank Douglas Fairhurst and Matthew Serfling for excellent research assistance. Klasa thanks the University of Arizona Eller College of Management for the financial support provided by the Anheuser-Busch Endowed Chair in Entrepreneurship Studies.


We find that firms mitigate refinancing risk by increasing their cash holdings and saving cash from cash flows. The maturity of firms’ long-term debt has shortened markedly, and this shortening explains a large fraction of the increase in cash holdings over time. Consistent with the inference that cash reserves are particularly valuable for firms with refinancing risk, we document that the value of these reserves is higher for such firms and that they mitigate underinvestment problems. Our findings imply that refinancing risk is a key determinant of cash holdings and highlight the interdependence of a firm's financial policy decisions.