Aggregate Risk and the Choice between Cash and Lines of Credit
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We model corporate liquidity policy and show that aggregate risk exposure is a key determinant of how firms choose between cash and bank credit lines. Banks create liquidity for firms by pooling their idiosyncratic risks. As a result, firms with high aggregate risk find it costly to get credit lines and opt for cash in spite of higher opportunity costs and liquidity premium. Likewise, in times when aggregate risk is high, firms rely more on cash than on credit lines. We verify these predictions empirically. Cross-sectional analyses show that firms with high exposure to systematic risk have a higher ratio of cash to credit lines and face higher spreads on their lines. Time-series analyses show that firms' cash reserves rise in times of high aggregate volatility and in such times credit lines initiations fall, their spreads widen, and maturities shorten. Our theory and evidence shed new insights on the relation between macroeconomic risk, financial intermediation, and firm financial decisions.
–Viral V. Acharya, NYUStern, CEPR, ECGI & NBER; Heitor Almeida, University of Illinois & NBER; Murillo Campello, University of Illinois & NBER