Working Paper: CEPR ID: DP8913
Authors: Viral V. Acharya; Heitor Almeida; Murillo Campello
Abstract: 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. Also consistent with the mechanism in the model, we find that exposure to undrawn credit lines increases bank-specific risks in times of high aggregate volatility.
Keywords: Asset Beta; Bank Lines of Credit; Cash Holdings; Liquidity Management; Loan Maturity; Loan Spreads; Systemic Risk
JEL Codes: E22; E5; G21; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate risk exposure (E10) | firms' choice between cash and bank credit lines (G21) |
| high aggregate risk (D81) | preference for cash holdings (E41) |
| high systematic risk exposure (G32) | higher cash-to-credit line ratio (E51) |
| high aggregate volatility (E19) | increase in firms' cash reserves (G32) |
| high aggregate volatility (E19) | decrease in credit line initiations (G21) |
| high aggregate volatility (E19) | widening of spreads on credit lines (F65) |
| exposure to undrawn credit lines (F65) | increase in bank-specific risks (G21) |
| one-standard deviation increase in asset beta (C46) | decrease in reliance on credit lines (G21) |
| high beta (C46) | worse contractual terms for credit lines (G21) |