Market Valuation of Cash Holdings: Role of Default Risk During COVID-19

This study utilizes the exogenous shock of the COVID-19 pandemic to test whether the market values the precautionary motive of cash holding. Our analysis considers the period 2017–2020 to capture the market value of cash holdings owing to the anticipation of potential containment policies. Using a generalized difference-in-difference methodology, we show that firms with high cash holdings have a positive market valuation due to the reduction of firms’ default risk. Additionally, using a causal mediation analysis, our study establishes the causal pathway through which cash affects firms’ market value during the COVID-19 pandemic. JEL Classifications: G01, G32, G12, E44