This study adopts a new perspective, misvaluation, to explain corporate propensity to hold cash. We find a strong cross-sectional relationship between misvaluation and the propensity to hold cash, which can be attributed to firms' investment, cash dividends, and equity raising activities. We further show that the equity issuance channel is driven by both firm-initiated issuance activities and the exercise of employee stock options. The results are robust after controlling for endogeneity issues. Several additional robustness tests reject alternative explanations, such as precautionary motives, agency conflicts, near-term cash needs, and tax motives.

This article examines the role of pre-saved cash in helping financially constrained firms during the 2000 dot-com crash and the 2008 financial crisis, both of which were exogenous shocks to industrial firms. The results show that constrained firms tended to increase capital investments during these severe economic downturns if they had pre-saved more cash. Constrained firms instead exhibited lower excess returns and incurred higher likelihoods of financial distress during the severe downturns if they had saved less cash prior to the events. Firms that experienced the 2000 dot-com crash and saved cash thereafter were less likely to default during the 2008 financial crisis, indicating the existence and benefit of learning effects. This study supports a precautionary motive for cash savings, showing that pre-saved cash helps financially constrained firms fund investment and reduces the likelihood of financial distress during severe market downturns. It demonstrates that saving for a rainy day really is valuable.

This study investigates the effects of bank safety-oriented cultures on loan contracts. We regress stock returns during the 1998 Long-Term Capital Management (LTCM) crisis on these risk-taking characteristics and obtain a residual component to proxy the safety-oriented culture of banks. Our empirical results show that banks with a safety-oriented culture increase the probability of signing a contract with low risk borrowers and that they charge lower loan spreads. We also find that these banks ask for more loan covenants to protect their creditor’s rights. Finally, banks with a safety-oriented culture suffer less from borrowers’ defaults and have higher market responses around the dates of loan announcements. Also, our findings reject the alternative hypothesis that banks with a safety-oriented culture only accept less risky lending due to their conservative risk attitude, thus destroying market value for banks.

In this study, we examine the impact of liquidity support from the Federal Reserve on the capital structures of firms of varying sizes. Our findings suggest that large firms tend to increase their debt financing and leverage ratios in response to significant shocks triggered by the large-scale asset purchases (LSAPs) of the US Federal Reserve. By contrast, small firms with preexisting banking relationships are more likely to receive liquidity support. Notably, small firms associated with smaller banks exhibit increased default risks. Furthermore, large firms exhibited weaker operating performance but received greater managerial compensation following the LSAP. This trend indicates potential inefficiencies in the distribution of funding facilitated by unconventional monetary policies.

We examine the effect of quantitative easing on the supply of bank loans. During the Fed’s quantitative easing programs, lending banks reduced relatively more loan spreads, offered longer loan maturities, provided larger loans, and loosened more covenants for firms whose long-term bond ratings were below BBB and were lower than those with investment-grade bond ratings. Furthermore, we find that new bank loans in this period were associated with a reduction in a firm’s value and an increase in default risk. These results indicate that banks took greater risk during the 2008 quantitative easing by relaxing lending standards to relatively riskier borrowers.