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 … have a higher ratio of cash reserves to lines of credit, controlling for other determinants of liquidity policy. This …

"Intuition suggests that firms with higher cash holdings are safer and should have lower credit spreads. Yet … empirically, the correlation between cash and spreads is robustly positive and higher for lower credit ratings. This puzzling … finding can be explained by the precautionary motive for saving cash. In our model endogenously determined optimal cash …