The Effects of Credit Lines on Cash Holdings and Capital Investment: Evidence from Japan

Tomohito Honda

No DP22-2, RCESR Discussion Paper Series from Research Center for Economic and Social Risks, Institute of Economic Research, Hitotsubashi University

Abstract: This study examines how credit lines affect corporate cash holdings and capital investment, using hand-collected data on credit lines for publicly traded Japanese firms for 2006–2017. Although theoretical research has explained the effects of credit lines in terms of the extensive margin, previous empirical studies have investigated the impacts of credit lines focusing on the intensive margin. Against this background, the present study concentrates on the extensive margin of the effects of credit lines and compares firms that have access to credit lines with those that do not. The empirical results are as follows: (1) firms with credit lines hold lower cash reserves than those without; (2) firms with credit lines undertake more capital investment than firms without; and (3) once firms gain access to credit lines, their cash holdings decrease and their capital investment increases. These empirical findings are consistent with the predictions of the theoretical literature and suggest that credit lines improve firms’ financial flexibility and enable firms to use cash holdings held for precautionary reasons for investment instead.

Keywords: Credit lines; Cash holdings; Corporate investment; Financial constraints (search for similar items in EconPapers)
JEL-codes: G31 G32 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-fdg and nep-sbm
Note: 09/29/2021 ver.
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Persistent link: https://EconPapers.repec.org/RePEc:hit:rcesrs:dp22-2

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