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Credit lines: The other side of corporate liquidity

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    Abstract

    In 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 Info

    Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1311.

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    Date of creation: Mar 2012
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    Handle: RePEc:upf:upfgen:1311

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    Web page: http://www.econ.upf.edu/

    Related research

    Keywords: cash holdings; credit lines; lines of credit; revolving credit facilities; trade-off theory; liquidity; financial constraints; covenants;

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