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Credit line use and availability in the financial crisis: the importance of hedging

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  • Jose M. Berrospide
  • Ralf R. Meisenzahl
  • Briana D. Sullivan
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    Abstract

    What determined the corporate use of credit lines in the recent financial crisis? To address this question we hand-collect data on credit lines and interest rate hedging for a random sample of 600 COMPUSTAT firms. We document that drawdowns of credit lines had already increased in 2007, earlier than what previous work has found. The surge in drawdowns occurred precisely when disruptions in bank funding markets began. In addition, we distinguish unused and available portions of credit lines, which we then use to disentangle credit supply and credit demand effects. On the supply side, we find covenant-induced reduction of credit supply to be small, and almost no evidence of credit line cancelations. On the demand side, our results confirm that while smaller and lower-rated firms use their credit lines more intensively in general, larger and higher-rated firms were more likely to draw on their credit lines during the crisis. We find that firms that use interest rate swaps to hedge the interest rate risk associated with their credit lines draw down significantly more from those lines than non-hedged firms.

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    Bibliographic Info

    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-27.

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    Date of creation: 2012
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    Handle: RePEc:fip:fedgfe:2012-27

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    1. Dittmar, Amy & Mahrt-Smith, Jan & Servaes, Henri, 2002. "Corporate Liquidity," CEPR Discussion Papers 3499, C.E.P.R. Discussion Papers.
    2. Acharya, Viral V & Almeida, Heitor & Campello, Murillo, 2012. "Aggregate Risk and the Choice between Cash and Lines of Credit," CEPR Discussion Papers 8913, C.E.P.R. Discussion Papers.
    3. Murillo Campello & Erasmo Giambona & John R. Graham & Campbell R. Harvey, 2010. "Liquidity Management and Corporate Investment During a Financial Crisis," NBER Working Papers 16309, National Bureau of Economic Research, Inc.
    4. Rocco Huang, 2010. "How committed are bank lines of credit? Experiences in the subprime mortgage crisis," Working Papers 10-25, Federal Reserve Bank of Philadelphia.
    5. Marcin Kacperczyk & Philipp Schnabl, 2010. "When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007-2009," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 29-50, Winter.
    6. Demiroglu, Cem & James, Christopher, 2011. "The use of bank lines of credit in corporate liquidity management: A review of empirical evidence," Journal of Banking & Finance, Elsevier, vol. 35(4), pages 775-782, April.
    7. Sudheer Chava & Michael R. Roberts, 2008. "How Does Financing Impact Investment? The Role of Debt Covenants," Journal of Finance, American Finance Association, vol. 63(5), pages 2085-2121, October.
    8. Judit Montoriol-Garriga & Evan Sekeris, 2009. "A question of liquidity: the great banking run of 2008?," Risk and Policy Analysis Unit Working Paper QAU09-4, Federal Reserve Bank of Boston.
    9. Cem Demiroglu & Christopher M. James, 2007. "The information content of bank loan covenants," Proceedings 1051, Federal Reserve Bank of Chicago.
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    Cited by:
    1. Acharya, Viral & Almeida, Heitor & Ippolito, Filippo & Perez, Ander, 2014. "Credit lines as monitored liquidity insurance: Theory and evidence," Journal of Financial Economics, Elsevier, vol. 112(3), pages 287-319.

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