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Credit lines as monitored liquidity insurance: Theory and evidence

  • Acharya, Viral
  • Almeida, Heitor
  • Ippolito, Filippo
  • Perez, Ander
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    We propose a theory of credit lines provided by banks to firms as a form of monitored liquidity insurance. Bank monitoring and resulting revocations help control illiquidity-seeking behavior of firms insured by credit lines. The cost of credit lines is thus greater for firms with high liquidity risk, which in turn are likely to use cash instead of credit lines. We test this implication for corporate liquidity management by identifying exogenous shocks to liquidity risk of firms in corporate bond and equity markets. Firms experiencing increases in liquidity risk move out of credit lines and into cash holdings.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X14000191
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    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 112 (2014)
    Issue (Month): 3 ()
    Pages: 287-319

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    Handle: RePEc:eee:jfinec:v:112:y:2014:i:3:p:287-319
    DOI: 10.1016/j.jfineco.2014.02.001
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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