To Bank or Not to Bank: The Determination of Cash Holdings and Lines of Credit

Ghada Tayem ()
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Ghada Tayem: University of Jordan

No 1130, Working Papers from Economic Research Forum

Abstract: This paper investigates two liquidity choices of listed Jordanian firms: internal represented by cash holdings and external represented by lines of credit. We document a significant substitution effect of lines of credit on cash holdings and show that this effect strengthens with banking relationships. In addition, we show that lines of credit are not viable liquidity substitute of cash for all firms. Firms with characteristics linked to high costs of external financing are significantly less likely to have access to lines of credit. Also, Ownership of the largest owner-controller exerts a significant negative impact on the probability of obtaining a line of credit. Finally, using a simultaneous equation framework to estimate the joint determination of cash holdings and lines of credit we find a significant impact of ownership of the largest owner-controller on cash holdings. This finding suggests that firms with large owner-controller pursue a liquidity policy of high cash holdings and no lines of credit.

Pages: 24
Date: 2017-17-08, Revised 2017
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