Financial distress and value of cash holdings: evidence from the Korean stock market

ABSTRACT

This study examines how investors in capital markets evaluate the levels of cash held by financially distressed companies. Facing financial hardship, managers first lower the bankruptcy risk by reducing internal capital outflows and securing liquidity. This increases the value of the business, as investors place a higher value on financially distressed companies that hold cash than on those that do not. Empirical results using the Korean stock market show that the higher the level of financial risk, the higher the value of cash holdings. The results of this study suggest that when in financial risk, a company must have sufficient cash for a high corporate valuation.

KEYWORDS:

• Financial distress
• value of cash holdings
• emerging market
• bankruptcy risk
• financial risk

JEL CLASSIFICATION:

• G14
• G30

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

This work was supported by the National Research Foundation of Korea Grant funded by the Korean Government under Grant [NRF-2020S1A5A8044467].