Refinancing Risk, Cash Holdings and Financial Reporting Opacity

This study investigates the effect of refinancing risk on cash holdings. Refinancing risk refers to the possibility that a firm may be unable to secure new financing after repaying its existing debt. Most firms engage in repeated cycles of borrowing and repayment to support ongoing operations, and it is common practice to repay debt at maturity with the intention of refinancing through new borrowing. As a result, firms are typically exposed to a certain level of refinancing risk (Froot et al., 1993). Firms hold a certain level of cash reserves to hedge against uncertainties in the business environment and to seize future investment opportunities. Cash serves as financial buffer that helps firms maintain liquidity when external financing becomes constrained and enables them to respond swiftly to unexpected costs or investment prospects (Opler et al., 1999). Therefore, in situations where refinancing is not readily available, maintaining adequate cash reserves is expected to play a critical role in enhancing a firm’s financial stability. To empirically test this expectation, this study examines how refinancing risk affects corporate cash holdings. The main findings are as follows. First, the results indicate that higher refinancing risk is associated with higher levels of corporate cash holdings. This suggests that as refinancing risk increases, firms tend to reduce their reliance on external financing and enhance financial flexibility by increasing their internal cash reserves. In other words, refinancing risk plays a significant role in shaping corporate cash management strategies. Second, the positive relationship between refinancing risk and cash holdings is more pronounced among firms with higher levels of financing reporting opacity. This findings implies that when information asymmetry is high, external financing becomes more difficult, prompting firms to adopt a more conservative cash holding policy. This study contributes to the literature by providing empirical evidence that refinancing risk significantly influences corporate cash holdings, an issue that has received relatively limited attention, partic ularly in the domestic context. Furthermore, the findings offer practical implications for financial institutions and leaders, who can incorporate insights on refinancing risk and corporate cash management into their credit evaluation and lending decisions. In addition, the results are expected to help corporate managers better understand the importance of liquidity management in the presence of refinancing risk and to develop more systematic cash management strategies.