We conjecture that a firm’s sensitivity to industry shocks escalates its need to retain a cash buffer. Consistent with our conjecture, we find that a one standard deviation increase in a firm’s industry risk exposure increases cash holdings by ten percent. In fact, industry risk has a greater effect on corporate cash holdings than economy-wide and idiosyncratic risk. The effect of industry risk exposure on corporate cash holdings is greater among firms in highly competitive industries, as well as for firms with high leverage, a greater amount of short-term debt, and few tangible assets.​

JEL Classification: G31, G32, D21, E32
Keywords: Cash holdings, Industry risk, Industry dynamics, Asset liquidity