Research On The Relationship Between Corporate Bond Credit Risk And Cash Holdings

In recent years, with the rapid development of Chinese credit bonds market, the proportion is rising. Although the actual default events have not occurred, yet there were a series of defaults signal. As the bond market matures, it will come true. Each link of the company whole management process cash flow is closely related to the credit risk, so the research on credit risk and liquidity has very important significance for investors timely risk management.Intuition suggests that firms with higher cash holdings are safer and should have lower credit spreads. Yet empirically, the correlation between liquidity and credit risk is robustly positive. How does the finding co-exist with the economic principle as "safer firms with higher cash holdings"? This puzzling can be explained by the precautionary motive for saving cash. In our model, it explains the positive correlation and negative correlation between cash and credit spreads. In the following analysis, exogenous cash reserves and spreads are negatively correlated. Ultimately, this paper focuses on the probability of default, another crucial aspect of credit risk. Our finding suggests that higher cash holdings may be related negatively to the short-run probability of default, while be positively in the long-run.The empirical analysis set the listing company which issued bonds as the research object, used the debt leverage, volatility, due to time and some financial datas as control variables. It applied IV regression to solve the endogeneity problem, and the results show that the cash and bond spreads significantly was negative correlation. While it is positive in the OLS regression, for the endogeneity playing the leading role. Liquidity and expected default rate is negative correlation in the short term, positive in long term. Our empirical analysis confirms these predictions, suggesting that precautionary savings are central to understanding the effects of cash on credit risk.The main implication of our analysis is that studies of credit risk should devote more attention to the potential endogeneity of some of the variables that are often taken as given. In addition, based on the discussion of the relationship between credit risk and cash holdings, more attention should be paid to the company level information instead of the macro economic factors when the investors investment in the bond market. Also they should pay attention to cash holdings on credit risk management.