Credit Lines: The Other Side of Corporate Liquidity
AbstractIn this paper we offer the first large sample evidence on the availability and usage of credit lines in U.S. public corporations and use it to re-examine the existing findings on corporate liquidity. We show that the availability of credit lines is widespread and that average undrawn credit is of the same order of magnitude as cash holdings. We test the trade-off theory of liquidity according to which firms target an optimum level of liquidity, computed as the sum of cash and undrawn credit lines. We provide support for the existence of a liquidity target, but also show that the reasons why firms hold cash and credit lines are very different. While the precautionary motive explains well cash holdings, the optimum level of credit lines appears to be driven by the restrictions imposed by the credit line itself, in terms of stated purpose and covenants. In support to these findings, credit line drawdowns are associated with capital expenditures, acquisitions, and working capital.
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Bibliographic InfoPaper provided by Barcelona Graduate School of Economics in its series Working Papers with number 618.
Date of creation: Mar 2012
Date of revision:
cash holdings; credit lines; lines of credit; revolving credit facilities; trade-off theory; liquidity; financial constraints; covenants;
Find related papers by JEL classification:
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
- D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
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- Almeida, Heitor & Campello, Murillo & Hackbarth, Dirk, 2011.
Journal of Financial Economics,
Elsevier, vol. 102(3), pages 526-558.
- Michael L. Lemmon & Michael R. Roberts & Jaime F. Zender, 2008. "Back to the Beginning: Persistence and the Cross-Section of Corporate Capital Structure," Journal of Finance, American Finance Association, vol. 63(4), pages 1575-1608, 08.
- Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2002. "Corporate Liquidity," CEPR Discussion Papers 3499, C.E.P.R. Discussion Papers.
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