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

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  • 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. (JEL G01, G14, G32, G35)Received July 13, 2020; editorial decision July 17, 2020 by Editor Andrew Ellul

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," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 430-471.
    • Handle: RePEc:oup:rcorpf:v:9:y:2020:i:3:p:430-471.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfaa013
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    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

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