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Aggregate Risk and the Choice between Cash and Lines of Credit
Author(s) -
ACHARYA VIRAL V.,
ALMEIDA HEITOR,
CAMPELLO MURILLO
Publication year - 2013
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12056
Subject(s) - cash , market liquidity , monetary economics , pooling , volatility (finance) , business , credit risk , liquidity risk , systematic risk , economics , finance , artificial intelligence , computer science
Banks can create liquidity for firms by pooling their idiosyncratic risks. As a result, bank lines of credit to firms with greater aggregate risk should be costlier and such firms opt for cash in spite of the incurred liquidity premium. We find empirical support for this novel theoretical insight. Firms with higher beta have a higher ratio of cash to credit lines and face greater costs on their lines. In times of heightened aggregate volatility, banks exposed to undrawn credit lines become riskier; bank credit lines feature fewer initiations, higher spreads, and shorter maturity; and, firms’ cash reserves rise.