When cash is king: funding conditions and the value of cash holdings

Previous research documents prominent associations between firm characteristics and the value of corporate cash holdings. Among these associations, the prior literature shows that firm-specific financial constraints influence the value of cash. We extend the prior literature by introducing time-varying aggregate financial constraints. We find that the value of cash holdings is conditional on aggregate funding conditions. Our findings also suggest that the relative outperformance of high cash firms in prior literature is largely, and for certain return metrics entirely, attributable to the relative performance of these firms during constrained funding periods. Additionally, contrary to the prior assertion that cash holdings allow constrained firms to make value-enhancing investments, we find evidence suggesting that during periods of constrained aggregate funding the benefits of cash holdings accrue primarily because they reduce the risk of financial distress.