liquidity may be related positively to the longer-term probability of default. Our empirical analysis confirms these predictions …

We 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 … opportunity costs and liquidity premium. We verify our model's hypothesis empirically by showing that firms with high asset beta …