Bank Soundness and Cash Holdings: Evidence from a Bank-Centered Financial Market

We examine the relationship between the bank’s soundness and cash holdings in Japan, which is a bank-centered market. We find that the deterioration of a bank’s soundness makes firms increase their cash holdings and the cash flow sensitivity of cash. The increase in cash mitigates underinvestment problems when their banks face serious bad-loan problems. Furthermore, the value of cash in firms with unsound banks is more valuable than in the firms...