Do Corporate Cash Holdings Decrease the Impact of Tail Risk Spillovers from the Financial Sector? The European Evidence

Abstract

We study the extent to which the impact of tail risk spillovers, originating in the financial sector and affecting real-economy firms, depends on the level of cash holdings and the financial conditions of the firm. Empirical evidence on 4,320 firms located in 16 European countries, from 2003 to 2011, suggests strong impacts for firms located in Euro-periphery countries. Firms located in Euro-core countries are less affected and firms located in the United Kingdom are barely affected. Cash holdings act as cushion of the impact of tail risk spillovers for financially constrained firms located in France, Netherlands, and United Kingdom.