Credit risk spillovers and cash holdings

This paper examines how credit risk spillovers affect corporate financial flexibility. We construct separate empirical proxies to disentangle the two channels of spillovers—credit contagion (CRC), where one firm's default increases distress likelihood another; and product market rivalry (PMR), same strengthens position a competitor. show that firms facing greater CRC have weaker subsequent operating performance must contend with less favorable bank loan terms. Meanwhile, they accumulate more cash by issuing equity, selling assets, reducing investment payout. In contrast, PMR generally has opposite, albeit weaker, effects. Our findings suggest spillovers, especially CRC, play an important role in liquidity management.