The Real Effects of Credit Line Drawdowns

Jose M. Berrospide and Ralf R. Meisenzahl
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Jose M. Berrospide: https://www.federalreserve.gov/econres/jose-m-berrospide.htm

No 2015-7, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Credit Lines; Financial Crisis; Investment; Liquidity Management (search for similar items in EconPapers)
JEL-codes: E22 G01 G31 G32 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2015-02-04
New Economics Papers: this item is included in nep-cfn, nep-mac and nep-mfd
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Citations: View citations in EconPapers (10)

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http://dx.doi.org/10.17016/FEDS.2015.007 http://dx.doi.org/10.17016/FEDS.2015.007 (application/pdf)

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