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The Real Effects of Credit Line Drawdowns

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Abstract

Do firms use credit line drawdowns to finance investment? Using a unique dataset of 467 COMPUSTAT firms with credit lines, we study the purpose of drawdowns during the 2007-2009 financial crisis. Our data show that credit line drawdowns had already increased in 2007, precisely when disruptions in bank funding markets began to squeeze aggregate liquidity. Consistent with theory, our results confirm that firms use drawdowns to sustain investment after an idiosyncratic liquidity shock. Using an instrumental variable approach based on institutional features of credit line contracts, we find that a one standard deviation increase in credit line drawdown is associated with an increase of 9 percent in average capital expenditures. Low aggregate liquidity amplifies this effect significantly. During the financial crisis, the effect of drawdowns on investment increased to 16 percent. The effect was even larger for smaller and financially constrained firms. We find only limited evidence, mostly for large and investment grade firms, that drawdowns were used to boost (precautionary) cash holdings during the crisis.

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  • Berrospide, Jose M. & Meisenzahl, Ralf R., 2015. "The Real Effects of Credit Line Drawdowns," Finance and Economics Discussion Series 2015-7, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2015-07
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    File URL: http://www.federalreserve.gov/econresdata/feds/2015/files/2015007pap.pdf
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    File URL: http://dx.doi.org/10.17016/FEDS.2015.007
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    References listed on IDEAS

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    1. Evan Gatev & Philip E. Strahan, 2006. "Banks' Advantage in Hedging Liquidity Risk: Theory and Evidence from the Commercial Paper Market," Journal of Finance, American Finance Association, vol. 61(2), pages 867-892, April.
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    3. 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.
    4. 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.
    5. Jean Tirole, 2006. "The Theory of Corporate Finance," Post-Print hal-00173191, HAL.
    6. Campello, Murillo & Graham, John R. & Harvey, Campbell R., 2010. "The real effects of financial constraints: Evidence from a financial crisis," Journal of Financial Economics, Elsevier, vol. 97(3), pages 470-487, September.
    7. Viral V. Acharya & Heitor Almeida & Murillo Campello, 2013. "Aggregate Risk and the Choice between Cash and Lines of Credit," Journal of Finance, American Finance Association, vol. 68(5), pages 2059-2116, October.
    8. Liang, J. Nellie & Falato, Antonio, 2013. "Do Creditor Rights Increase Employment Risk? Evidence from Loan Covenants," Finance and Economics Discussion Series 2014-61, Board of Governors of the Federal Reserve System (U.S.).
    9. Judit Montoriol-Garriga & Evan G. 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.
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    Cited by:

    1. Stefan Behrendt, 2016. "Taking Stock - Credit Measures in Monetary Transmission," Jena Economic Research Papers 2016-002, Friedrich-Schiller-University Jena.
    2. Ippolito, Filippo & Peydró, José-Luis & Polo, Andrea & Sette, Enrico, 2016. "Double bank runs and liquidity risk management," Journal of Financial Economics, Elsevier, vol. 122(1), pages 135-154.
    3. Pagratis, Spyros & Topaloglou, Nikolas & Tsionas, Mike, 2017. "System stress testing of bank liquidity risk," Journal of International Money and Finance, Elsevier, vol. 73(PA), pages 22-40.

    More about this item

    Keywords

    Credit Lines; Financial Crisis; Investment; Liquidity Management;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G01 - Financial Economics - - General - - - Financial Crises
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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