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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

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.

Suggested Citation

  • Billett, Matthew T & Garfinkel, Jon A, 2004. "Financial Flexibility and the Cost of External Finance for U.S. Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 827-852, October.
  • Handle: RePEc:mcb:jmoncb:v:36:y:2004:i:5:p:827-52
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    Cited by:

    1. S. Demiralp & J. Eisenschmidt & T. Vlassopoulos, 2017. "Negative interest rates, excess liquidity and bank business models: Banks’ reaction to unconventional monetary policy in the euro area," Koç University-TUSIAD Economic Research Forum Working Papers 1708, Koc University-TUSIAD Economic Research Forum.
    2. Laktionova Oleksandra A., 2014. "Financial Flexibility as a Phenomenon of Manifestation of Flexibility of the Financial System at the Micro-level," Business Inform, RESEARCH CENTRE FOR INDUSTRIAL DEVELOPMENT PROBLEMS of NAS (KHARKIV, UKRAINE), Kharkiv National University of Economics, issue 3, pages 301-310.
    3. 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.
    4. Mierzejewski, Fernando, 2008. "The optimal liquidity principle with restricted borrowing," MPRA Paper 12549, University Library of Munich, Germany.
    5. Valeriya Dinger & Jürgen Von Hagen, 2009. "Does Interbank Borrowing Reduce Bank Risk?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 491-506, March.
    6. 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.
    7. Huang, R. & Ratnovksi, L., 2009. "The Dark Side of Bank Wholesale Funding," Discussion Paper 2009-59 S, Tilburg University, Center for Economic Research.
    8. Thomas J. Carter, 2017. "Optimal Interbank Regulation," Staff Working Papers 17-48, Bank of Canada.
    9. 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.
    10. Benoît D'Udekem, 2014. "Bank Cash Holdings and Investor Uncertainty," Working Papers CEB 14-002, ULB -- Universite Libre de Bruxelles.

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