Corporate reputation risk and cash holdings

Abstract

AbstractWe investigate the extent to which corporate reputation risk influences cash holdings for US listed firms over the period 2007–2018. Our results show that firms having a high reputation risk hold significantly more cash. This documented relationship persists even after controlling for other determinants of cash holdings, including corporate social responsibility performance, explicitly. Using a series of analyses, we show that this relationship is not driven by endogeneity problems. Further, we find that the positive relationship between reputation risk and cash holdings is more pronounced for firms with more financing constraints and agency problems, and for growth, mature and shake‐out firms. In an additional test, we show that firms having a low reputation risk are associated with a higher marginal value of cash than are their high reputation risk counterparts. Overall, we provide robust evidence that reputation risk matters for corporate cash holdings.