UC Riverside

I find a persistently positive relationship between debt and acquired cash, contradicting the pecking order preference (Myers, 1984) of internal financing over external debt. Using a broad cross-section of firms from 2003-2019, this positive relationship increases for larger firms with lower information asymmetry, higher debt capacity, greater multinational operations, and greater financial constraints identified by Altman Z-Score and textual analysis of SEC filings. The convexity of this relationship supports the increasing benefits of debt due to taxes while textual analysis supports the role of cash in relieving financial constraints on debt. This evidence supports a “cash collateral" channel where distressed firms can acquire cash to mitigate the adverse effects of financial constraints of leverage.

When the Federal Reserve first started to pay interest on excess reserves (IOER) in October 2008, it presented a choice that banks had not previously faced. That is, they could invest bank capital in precautionary excess reserves and earn the “better than” risk-free rate or they could lend and earn a higher, but riskier interest rate. This paper provides empirical evidence of banks using a risk-adjusted framework to maximize returns when deploying capital between loan assets and excess reserve assets. Two-stage panel estimations show that “reserve premiums” are associated with a 6% or $408.5 billion reduction in total US bank lending. This IOER channel highlights the tradeoff between credit access by economic participants and the precautionary buildup of excess reserves in the US banking system.

Uncertainty in banking regulation may impose widespread economic costs by increasing financial constraints on credit availability. Four years of Dodd-Frank uncertainty over undecided risk weightings increased regulatory uncertainty for smaller banks, restricting "vanilla" interest rate hedging activities. This paper uses newly reported mortgage banking data as an identification strategy and finds that when costs of uncertainty are removed, small banks hedge 97-120% more interest rate risk while mortgage securitization income increases by 65.2% compared to large banks. These findings support the need for tailored regulations that considers the higher costs of regulatory

uncertainty for smaller banks.