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Financial Flexibility and the Cost of External Finance for U.S. Bank Holding Companies

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  • Billett, Matthew T
  • Garfinkel, Jon A
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    Abstract

    This paper models a bank with access to two segmented capital markets, the market for insured deposits and the market for uninsured claims. We illustrate how higher costs of accessing either market leads to lower firm values and a greater incentive to carry liquid assets. We test our model on a sample of large banking firms, and label banks with relatively lower costs of accessing the two markets as more "financially flexible." Our two key findings are (1) banks with greater financial flexibility have greater value, and (2) banks with greater financial flexibility devote a smaller percentage of assets to cash and marketable securities, consistent with the notion that financial flexibility reduces the sensitivity of firm profits to internal wealth shocks, thus reducing the firm's need to carry financial slack.

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    Bibliographic Info

    Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

    Volume (Year): 36 (2004)
    Issue (Month): 5 (October)
    Pages: 827-52

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    Handle: RePEc:mcb:jmoncb:v:36:y:2004:i:5:p:827-52

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0022-2879

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    Cited by:
    1. Dinger, Valeriya & von Hagen, Jürgen, 2008. "Does Interbank Borrowing Reduce Bank Risk?," CEPR Discussion Papers 6635, C.E.P.R. Discussion Papers.
    2. Özgür Arslan-Ayaydin & Chris Florackis & Aydin Ozkan, 2014. "Financial flexibility, corporate investment and performance: evidence from financial crises," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 211-250, February.
    3. Rudd, John M. & Greenley, Gordon E. & Beatson, Amanda T. & Lings, Ian N., 2008. "Strategic planning and performance: Extending the debate," Journal of Business Research, Elsevier, vol. 61(2), pages 99-108, February.
    4. Garfinkel, Jon A. & Hankins, Kristine Watson, 2011. "The role of risk management in mergers and merger waves," Journal of Financial Economics, Elsevier, vol. 101(3), pages 515-532, September.

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