Signaling effect of cash holdings adjustment before bond issuance

Using Fixed Income Securities Database bond issuance data, we examine how firms' cash holding adjustment exhibits a signaling effect prior to corporate bond issuance; we also examine the meaning of this effect on firms' capital policy. Analyzing a sample of U.S. bonds from 1981 to 2018, the results found that bond issuers adjust their cash holdings higher prior to bond issuance compared to non-issuer firms. After controlling for various firm and bond characteristics, we found that firms that adjust their cash holdings higher attract investors' attention, thus resulting in lower bond spreads. Our results also perform different patterns in subsamples when adopting accrued and real earnings management, financial constraints, and corporate opacity.