Corporate Cash Holdings and Value Following a Credit Rating Change ^

We examine the influence of credit rating changes on corporate cash and excess cash holdings. We find that firms respond to downgrades by increasing the amount of actual and excess cash holdings. We largely observe no significant change in cash policy following upgrades. This asymmetric response is consistent with the documented stock price reaction following downgrades and upgrades. The increased excess cash holdings following downgrades is consistent with the theory that managers may hoard money as their firms become more financially constrained, either as a safety net in the event of potential future financial distress or due to reduced access to financial markets. However, we find the increase in excess cash holdings after downgrades is value-decreasing for shareholders