IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/27601.html
   My bibliography  Save this paper

The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID

Author

Listed:
  • Viral V. Acharya
  • Sascha Steffen

Abstract

Data on firm-loan-level daily credit line drawdowns in the United States expose a corporate “dash for cash” induced by the COVID-19 pandemic. In the first phase of the crisis, which was characterized by extreme precaution and heightened aggregate risk, all firms drew down bank credit lines and raised cash levels. In the second phase, which followed the adoption of stabilization policies, only the highest-rated firms switched to capital markets to raise cash. Consistent with the risk of becoming a fallen angel, the lowest-quality BBB-rated firms behaved more similarly to non-investment grade firms. The observed corporate behavior reveals the significant impact of credit risk on corporate cash holdings.

Suggested Citation

  • Viral V. Acharya & Sascha Steffen, 2020. "The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID," NBER Working Papers 27601, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:27601
    Note: CF
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w27601.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rüdiger Fahlenbrach & Kevin Rageth & René M Stulz, 2021. "How Valuable Is Financial Flexibility when Revenue Stops? Evidence from the COVID-19 Crisis [The risk of being a fallen angel and the corporate dash for cash in the midst of COVID]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5474-5521.
    2. Zhiguo He & Wei Xiong, 2012. "Rollover Risk and Credit Risk," Journal of Finance, American Finance Association, vol. 67(2), pages 391-430, April.
    3. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    4. Lei Li & Philip E. Strahan & Song Zhang, 2020. "Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis," NBER Working Papers 27256, National Bureau of Economic Research, Inc.
    5. repec:oup:rfinst:v:25:y::i:12:p:3572-3609 is not listed on IDEAS
    6. Elena Carletti & Tommaso Oliviero & Marco Pagano & Loriana Pelizzon & Marti G Subrahmanyam, 2020. "The COVID-19 Shock and Equity Shortfall: Firm-Level Evidence from Italy," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 534-568.
    7. Acharya, Viral & Byoun, Soku & Xu, Zhaoxia, 2020. "The Sensitivity of Cash Savings to the Cost of Capital," CEPR Discussion Papers 15059, C.E.P.R. Discussion Papers.
    8. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    9. Stefano Ramelli & Alexander F. Wagner, 2020. "Feverish Stock Price Reactions to COVID-19," Swiss Finance Institute Research Paper Series 20-12, Swiss Finance Institute.
    10. Ellul, Andrew & Jotikasthira, Chotibhak & Lundblad, Christian T., 2011. "Regulatory pressure and fire sales in the corporate bond market," Journal of Financial Economics, Elsevier, vol. 101(3), pages 596-620, September.
    11. Viral Acharya & Sergei A. Davydenko & Ilya A. Strebulaev, 2012. "Cash Holdings and Credit Risk," The Review of Financial Studies, Society for Financial Studies, vol. 25(12), pages 3572-3609.
    12. Opler, Tim & Pinkowitz, Lee & Stulz, Rene & Williamson, Rohan, 1999. "The determinants and implications of corporate cash holdings," Journal of Financial Economics, Elsevier, vol. 52(1), pages 3-46, April.
    13. Tobias Berg & Anthony Saunders & Sascha Steffen & Daniel Streitz, 2017. "Mind the Gap: The Difference between U.S. and European Loan Rates," The Review of Financial Studies, Society for Financial Studies, vol. 30(3), pages 948-987.
    14. Niels Joachim Gormsen & Ralph S J Koijen & Nikolai Roussanov, 0. "Coronavirus: Impact on Stock Prices and Growth Expectations," The Review of Asset Pricing Studies, Society for Financial Studies, vol. 10(4), pages 574-597.
    15. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    16. Pagano, Marco & Wagner, Christian & Zechner, Josef, 2023. "Disaster resilience and asset prices," Journal of Financial Economics, Elsevier, vol. 150(2).
    17. Lei Li & Philip E Strahan & Song Zhang, 2020. "Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 472-500.
    18. Viral V. Acharya & Heitor Almeida & Murillo Campello, 2013. "Aggregate Risk and the Choice between Cash and Lines of Credit," Journal of Finance, American Finance Association, vol. 68(5), pages 2059-2116, October.
    19. Tobias Berg & Anthony Saunders & Sascha Steffen, 2016. "The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees," Journal of Finance, American Finance Association, vol. 71(3), pages 1357-1392, June.
    20. Ivashina, Victoria & Scharfstein, David, 2010. "Bank lending during the financial crisis of 2008," Journal of Financial Economics, Elsevier, vol. 97(3), pages 319-338, September.
    21. Wagner, Alexander F. & Ramelli, Stefano, 2020. "Feverish Stock Price Reactions to COVID-19," CEPR Discussion Papers 14511, C.E.P.R. Discussion Papers.
    22. José A. Azar & Jean-François Kagy & Martin C. Schmalz, 2016. "Can Changes in the Cost of Carry Explain the Dynamics of Corporate "Cash" Holdings?," The Review of Financial Studies, Society for Financial Studies, vol. 29(8), pages 2194-2240.
    23. Lei Li & Philip E Strahan & Song Zhang, 0. "Banks as Lenders of First Resort: Evidence from the COVID-19 Crisis," Review of Corporate Finance Studies, Oxford University Press, vol. 9(3), pages 472-500.
    24. Stefano Ramelli & Alexander F Wagner, 2020. "Feverish Stock Price Reactions to COVID-19," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 622-655.
    25. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, August.
    26. Stefano Ramelli & Alexander F Wagner, 0. "Feverish Stock Price Reactions to COVID-19," Review of Corporate Finance Studies, Oxford University Press, vol. 9(3), pages 622-655.
    27. Elena Carletti & Tommaso Oliviero & Marco Pagano & Loriana Pelizzon & Marti G Subrahmanyam, 0. "The COVID-19 Shock and Equity Shortfall: Firm-Level Evidence from Italy," Review of Corporate Finance Studies, Oxford University Press, vol. 9(3), pages 534-568.
    28. David Disatnik & Ran Duchin & Breno Schmidt, 2014. "Cash Flow Hedging and Liquidity Choices," Review of Finance, European Finance Association, vol. 18(2), pages 715-748.
    29. Duchin, Ran & Ozbas, Oguzhan & Sensoy, Berk A., 2010. "Costly external finance, corporate investment, and the subprime mortgage credit crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 418-435, September.
    30. Tobias Berg, 2018. "Got Rejected? Real Effects of Not Getting a Loan," The Review of Financial Studies, Society for Financial Studies, vol. 31(12), pages 4912-4957.
    31. Amir Sufi, 2009. "Bank Lines of Credit in Corporate Finance: An Empirical Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1057-1088, March.
    32. Amir Sufi, 2009. "Bank Lines of Credit in Corporate Finance: An Empirical Analysis," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1057-1088.
    33. Viral V. Acharya & Nada Mora, 2015. "A Crisis of Banks as Liquidity Providers," Journal of Finance, American Finance Association, vol. 70(1), pages 1-43, February.
    34. Eisfeldt, Andrea L. & Muir, Tyler, 2016. "Aggregate external financing and savings waves," Journal of Monetary Economics, Elsevier, vol. 84(C), pages 116-133.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Viral V. Acharya & Robert F. Engle III & Maximilian Jager & Sascha Steffen, 2021. "Why Did Bank Stocks Crash During COVID-19?," NBER Working Papers 28559, National Bureau of Economic Research, Inc.
    2. Dunbar, Kwamie, 2022. "Impact of the COVID-19 event on U.S. banks’ financial soundness," Research in International Business and Finance, Elsevier, vol. 59(C).
    3. Liu, Ya & Qiu, Buhui & Wang, Teng, 2021. "Debt rollover risk, credit default swap spread and stock returns: Evidence from the COVID-19 crisis," Journal of Financial Stability, Elsevier, vol. 53(C).
    4. Ducret, Romain, 2021. "Investors' perception of business group membership during an economic crisis : Evidence from the COVID-19 pandemic," FSES Working Papers 524, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    5. Chung, Hae Jin & Jhang, Hogyu & Ryu, Doojin, 2023. "Impacts of COVID-19 pandemic on corporate cash holdings: Evidence from Korea," Emerging Markets Review, Elsevier, vol. 56(C).
    6. Heitor Almeida & Murillo Campello & Igor Cunha & Michael S. Weisbach, 2014. "Corporate Liquidity Management: A Conceptual Framework and Survey," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 135-162, December.
    7. Corsten, Daniel & Gropp, Reint E. & Markou, Panos, 2017. "Suppliers as liquidity insurers," IWH Discussion Papers 8/2017, Halle Institute for Economic Research (IWH).
    8. Nguyen, Harvey & Pham, Anh Viet & Pham, Man Duy (Marty) & Pham, Mia Hang, 2023. "Business resilience: Lessons from government responses to the global COVID-19 crisis," International Business Review, Elsevier, vol. 32(5).
    9. Greppmair, Stefan & Jank, Stephan & Smajlbegovic, Esad, 2023. "On the importance of fiscal space: Evidence from short sellers during the COVID-19 pandemic," Journal of Banking & Finance, Elsevier, vol. 147(C).
    10. Chodorow-Reich, Gabriel & Darmouni, Olivier & Luck, Stephan & Plosser, Matthew, 2022. "Bank liquidity provision across the firm size distribution," Journal of Financial Economics, Elsevier, vol. 144(3), pages 908-932.
    11. Massimiliano Affinito & Raffaele Santioni, 2021. "When the panic broke out: COVID-19 and investment funds' portfolio rebalancing around the world," Temi di discussione (Economic working papers) 1342, Bank of Italy, Economic Research and International Relations Area.
    12. Rahman, Md Lutfur & Al Mamun, Mohammed Abdullah, 2021. "How resilient are the Asia Pacific financial markets against a global pandemic?," Pacific-Basin Finance Journal, Elsevier, vol. 69(C).
    13. Ali Gungoraydinoglu & Ilke Öztekin & Özde Öztekin, 2021. "The Impact of COVID-19 and Its Policy Responses on Local Economy and Health Conditions," JRFM, MDPI, vol. 14(6), pages 1-27, May.
    14. Michal Bernardelli & Zbigniew Korzeb & Pawel Niedziolka, 2021. "The banking sector as the absorber of the COVID-19 crisis’ economic consequences: perception of WSE investors," Oeconomia Copernicana, Institute of Economic Research, vol. 12(2), pages 335-374, June.
    15. Marco Pagano & Josef Zechner, 2022. "COVID-19 and Corporate Finance [The risk of being a fallen angel and the corporate dash for cash in the midst of COVID]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(4), pages 849-879.
    16. Laeven, Luc, 2022. "Pandemics, intermediate goods, and corporate valuation," Journal of International Money and Finance, Elsevier, vol. 120(C).
    17. May, Anthony D., 2014. "Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 410-429.
    18. Heyden, Kim J. & Heyden, Thomas, 2021. "Market reactions to the arrival and containment of COVID-19: An event study," Finance Research Letters, Elsevier, vol. 38(C).
    19. Ding, Wenzhi & Levine, Ross & Lin, Chen & Xie, Wensi, 2021. "Corporate immunity to the COVID-19 pandemic," Journal of Financial Economics, Elsevier, vol. 141(2), pages 802-830.
    20. Ahrends, Meike & Drobetz, Wolfgang & Puhan, Tatjana Xenia, 2018. "Cyclicality of growth opportunities and the value of cash holdings," Journal of Financial Stability, Elsevier, vol. 37(C), pages 74-96.

    More about this item

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:27601. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.