The relationship between debt maturity and cash holdings

Abstract

The aim of this thesis is to examine the relationship between debt maturity and cash holdings in United States companies from 1980 to 2023. The hypothesis is that when the average debt maturity of a company is shorter, the cash reserves are larger for precautionary reasons. To analyse this, I study how debt characteristics and cash holdings evolve over time, finding that firms have been lengthening the maturity of their debt and increasing their cash reserves in recent years. The COVID-19 pandemic may have played a role in this. To further test my hypothesis, I use debt maturity, measured as the portion of long-term debt that is due in the next three year, as the dependent variable in a regression, with independent variables including firm characteristics and macroeconomic variables. A higher dependent variable value implies that a larger portion of the firm’s long-term debt is coming due in the near term suggesting that the average debt maturity is shorter. Additionally, I estimate a regression where the dependent variable is cash holdings. In both regressions, cash holdings and debt maturity are statistically significant and negatively related, suggesting that firms with higher cash holdings tend to have longer average debt maturities. However, a key limitation in this thesis is that debt maturity and cash holdings are likely determined simultaneously, making them endogenous. This suggests that the observed negative relationship may be driven by endogeneity rather than a true causal effect.

Date of Award	24 Apr 2025
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Diana Bonfim (Supervisor)