Where Does F& M State Bank Invest Depositors Money
journal article
The RAND Journal of Economics
Published By: Wiley
https://doi.org/10.2307/2555434
https://www. jstor .org/stable/2555434
Banks know more about the quality of their assets than do outside investors. This informational asymmetry can distort investment decisions if the bank must raise funds from uninformed outsiders. We model the effect of asymmetric information about loan quality on the asset and liability decisions of banks and the market valuation of bank liabilities. The existence of a precautionary demand for riskless securities against future liquidity needs depends on both the regulatory environment and the informational structure. If banks are ex ante identical, they prefer issuing risky debt to fund a withdrawal to holding riskless securities ex ante. If banks have partial knowledge of loan quality, however, high-quality banks may hold riskless securities to signal their quality, enabling them to issue risky debt at a lower interest rate. We present new empirical evidence that banks with higher asset quality do in fact hold more cash and securities.
The purpose of the RAND Journal of Economics, formerly the Bell Journal of Economics, is to support and encourage research in the behavior of regulated industries, the economic analysis of organizations, and more generally, applied microeconomics. Both theoretical and empirical manuscripts in economics and law are encouraged. Website: www.rje.org
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Where Does F& M State Bank Invest Depositors Money
Source: https://www.jstor.org/stable/2555434
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