Cash Holdings and Debt Structure

Abstract

We empirically examine how corporate cash holdings relate to debt structure, that is, the fraction of bond financing. We find that the relation between cash holdings and bond financing is U-shaped in the cross-section of firms. That is, firms that do not use bond financing or those that are entirely bond financed exhibit the highest cash holdings. The differential in cash holdings due to heterogeneity in bond financing is substantial and amounts up to 20% of assets. Moreover, the intensity of bond financing is also non-linearly related to market-to-book assets, firm size and leverage. We present a model of financial constraints to rationalize these patterns.