Aggregate Risk and the Choice between Cash and Lines of Credit





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    • Viral V. Acharya is with NYU–Stern, CEPR, ECGI, and NBER. Heitor Almeida is with University of Illinois and NBER. Murillo Campello is with Cornell University and NBER. Our paper benefited from comments from Peter Tufano (Acting Editor); an anonymous referee; Hui Chen, Ran Duchin, and Robert McDonald (discussants); René Stulz; as well as seminar participants at the 2010 AEA meetings, 2010 WFA meetings, DePaul University, ESSEC, Emory University, MIT, Moody's/NYU–Stern 2010 Credit Risk Conference, New York University, Northwestern University, UCLA, University of Illinois, Vienna University of Economics and Business, Yale University, University of Southern California, and UCSD. We thank Florin Vasvari and Anurag Gupta for help with the data on lines of credit, and Michael Roberts and Florin Vasvari for matching these data with COMPUSTAT. Farhang Farazmand, Fabrício D'Almeida, Igor Cunha, Rustom Irani, Hanh Le, Ping Liu, and Quoc Nguyen provided excellent research assistance. We are also grateful to Jaewon Choi for sharing his data on firm betas, and to Thomas Philippon and Ran Duchin for sharing their programs to compute asset and financing gap betas.


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.