Abstract
AbstractI conjecture that a firm's sensitivity to industry shocks escalates its need to retain a cash buffer. Consistent with this conjecture, I find that a 1 SD increase in a firm's industry risk exposure increases cash holdings by 10%. In fact, industry risk has a greater effect on corporate cash holdings than does economywide and idiosyncratic risk in my sample. The effect of industry risk exposure on corporate cash holdings is greater for firms in highly competitive industries, as well as for firms with high leverage, a greater fraction of short‐term debt, and few tangible assets.
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