Corporate Cash Holdings and the Refinancing Risk of Bank Debt and Non-Bank Debt

Abstract: We empirically examine the relationship between a firm's debt composition and refinancing risk. In particular, we analyze the effects of non-bank debt on refinancing risk as the existing literature shows that both the ex-ante and ex-post costs of refinancing problems are higher for non-bank debt than for bank debt. We therefore propose that non-bank debt is associated with higher refinancing risk than bank debt. Following recent research findings we employ firms' cash holdings as a proxy measure of refinancing risk for a sample of U.S. incorporated firms over the ten year period from 2003 to 2013. We find that firms seem to accumulate cash in order to offset the refinancing risk associated with non-bank debt. Further analysis indicates that the effect is most accentuated for firms with relatively high leverage and for firms with relatively high non-bank debt proportions. We also find indications that the observed hedging behavior could be either of negative value to shareholders or mispriced by equity markets.