Refinancing risk and the cash-debt maturity relationship of Australian firms

Wellingham, Thomas (2013). Refinancing risk and the cash-debt maturity relationship of Australian firms Honours Thesis, UQ Business School, The University of Queensland.

       
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Author Wellingham, Thomas
Thesis Title Refinancing risk and the cash-debt maturity relationship of Australian firms
School, Centre or Institute UQ Business School
Institution The University of Queensland
Publication date 2013-05
Thesis type Honours Thesis
Supervisor Robert Faff
Shams Pathan
Total pages 99
Language eng
Subjects 1502 Banking, Finance and Investment
Abstract/Summary This thesis examines the extent to which Australian firms’ cash holdings are held as defence against the risk of refinancing their debt. I argue that a firm with a short debt maturity is likely to hold greater cash as it is forced to refinance a greater number of times and is therefore exposed to greater risk of having to refinance on unfavourable terms. Using a Sample of 261 Australian firms from 1992 to 2009 I use a number of econometric techniques to determine whether debt maturity is a key determinant of cash holdings, whether debt maturity plays a role in determining how the market values cash and if debt maturity affects the role cash plays in funding investment. Consistent with my hypotheses, my results suggest that debt maturity is negatively associated with cash holdings meaning firms with shorter (longer) debt maturity tend to hold more (less) cash. I conjecture that this is to protect themselves from the risk of refinancing on unfavourable terms. I also document that this relationship is not only statistically significant but highly economically significant as well. The economic significance I find is almost double that reported in the US, suggesting that Australian firm’s relative lack of debt financing options plays a role in increasing the risk of refinancing for Australian firms. Despite these results I do not find evidence that a firm’s debt maturity affects the extent to which an additional dollar of cash is valued by the market nor that a firm’s debt maturity affects the role cash plays in funding investment. My other key finding is that, contrary to findings from the US market, the state of the credit market does not seem to influence the relationship between debt maturity and cash, suggesting key differences in how a firm responds to exogenous shifts in the macroeconomic environment. Overall my findings show that refinancing risk is a concern to Australian firms and a key determinant of corporate cash holdings policy.

 
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Created: Mon, 03 Feb 2014, 14:55:56 EST by Karen Morgan on behalf of UQ Business School