Precautionary Debt Capacity

Deniz Aydin and Olivia S. Kim

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: Firms with ample financial slack are unconstrained... or are they? In a field experiment that randomly expands debt capacity on business credit lines, treated small-and-medium enterprises (SMEs) draw down 35 cents on the dollar of expanded debt capacity in the short-run and 55 cents in the long-run despite having debt levels far below their borrowing limit before the intervention. SMEs direct new borrowing to financing investment gradually over time and do not exhibit a measurable impact on delinquencies. Heterogeneity analysis by the risk of being at the credit line limit supports the SME motive to preserve financial flexibility.

Keywords: field experiment; RCT; finance; investment; debt structure (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-exp and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:281672

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