Credit lines as monitored liquidity insurance: Theory and evidence

Viral Acharya, Heitor Almeida, Filippo Ippolito () and Ander Perez

Journal of Financial Economics, 2014, vol. 112, issue 3, 287-319

Abstract: 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.

Keywords: Liquidity management; Cash holdings; Liquidity risk; Hedging; Covenants; Loan commitments; Credit line revocation (search for similar items in EconPapers)
JEL-codes: E22 E5 G21 G31 G32 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (82)

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Related works:
Working Paper: Credit Lines as Monitored Liquidity Insurance: Theory and Evidence (2013)
Working Paper: Credit Lines as Monitored Liquidity Insurance: Theory and Evidence (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:112:y:2014:i:3:p:287-319

DOI: 10.1016/j.jfineco.2014.02.001

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