"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...

Positive contracting costs (imperfect marketability), the impos-sibility of complete spanning of State spaces and other market imperfections explain the relevance of the corporate buying of property and liability insurance. For a corporation with diffuse ownership, risk aversion is irrelevant,...