Debt capacity, cash holdings and financial constraints

Chien Lin Lu*, Hsuan Chi Chen, Robin K. Chou, Chih Yung Lin

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

In this study, we explore the relationship among debt capacity, cash holdings and financial constraints by using the deviation in leverage as a proxy for debt capacity. Our findings show a positive relationship between cash holdings and debt capacity. Furthermore, financially constrained firms benefit more from holding cash that leads to larger increases in debt capacity and easier access to bank loans and credit lines by reducing the heterogeneous beliefs of creditors. Our results indicate that cash holdings complement debt capacity for financially constrained firms.

Original languageEnglish
JournalJournal of Business Finance and Accounting
DOIs
StateAccepted/In press - 2023

Keywords

  • cash holdings
  • debt capacity
  • debt structure
  • financial constraints
  • leverage deviation

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