Aggregate risk and the choice between cash and lines of credit

Viral V. Acharya, Heitor Almeida, Murillo Campello

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish (US)
Pages (from-to)2059-2116
Number of pages58
JournalJournal of Finance
Volume68
Issue number5
DOIs
StatePublished - Oct 1 2013

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Aggregate risk and the choice between cash and lines of credit'. Together they form a unique fingerprint.

  • Cite this