Credit lines: The other side of corporate liquidity

Filippo Ippolito () and Ander Pérez Orive ()
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Ander Pérez Orive: https://www.upf.edu/web/econ/faculty/-/asset_publisher/6aWmmXf28uXT/persona/id/3419769

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: In this paper we offer the first large sample evidence on the availability and usage of credit lines in U.S. public corporations and use it to re-examine the existing findings on corporate liquidity. We show that the availability of credit lines is widespread and that average undrawn credit is of the same order of magnitude as cash holdings. We test the trade-off theory of liquidity according to which firms target an optimum level of liquidity, computed as the sum of cash and undrawn credit lines. We provide support for the existence of a liquidity target, but also show that the reasons why firms hold cash and credit lines are very different. While the precautionary motive explains well cash holdings, the optimum level of credit lines appears to be driven by the restrictions imposed by the credit line itself, in terms of stated purpose and covenants. In support to these findings, credit line drawdowns are associated with capital expenditures, acquisitions, and working capital.

Keywords: cash holdings; credit lines; lines of credit; revolving credit facilities; trade-off theory; liquidity; financial constraints; covenants (search for similar items in EconPapers)
JEL-codes: D22 G30 G31 (search for similar items in EconPapers)
Date: 2012-03
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Related works:
Working Paper: Credit Lines: The Other Side of Corporate Liquidity (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1311

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