Data Management

Aggregate Risk And The Choice Between Cash And Lines Of Credit

Free registration required

Executive Summary

The authors argue that a firm's aggregate risk is a key determinant of whether it manages its future liquidity needs through cash reserves or bank lines of credit. 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 from banks and opt for cash reserves in spite of higher opportunity costs and liquidity premium. They verify the model's hypothesis empirically by showing that firms with high asset beta have a higher ratio of cash reserves to lines of credit, controlling for other determinants of liquidity policy.

  • Format: PDF
  • Size: 600.93 KB