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Dynamic corporate liquidity

Author

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  • Nikolov, Boris
  • Schmid, Lukas
  • Steri, Roberto

Abstract

In contrast to cash holdings, credit lines give firms financial flexibility by providing liquidity contingent on realized funding needs, but they are often limited by collateral and covenants. We embed this trade-off into an estimated dynamic model of financing and investment. Our model highlights the relevance of drawing down credit lines to fund investment options in an effective way and quantitatively matches well the levels and dynamics of cash, credit lines, and leverage. In the cross-section, modeling credit lines as contingent liquidity provides novel empirical predictions and rationalizes several stylized facts regarding credit line usage, covenant violations, and cash holdings.

Suggested Citation

  • Nikolov, Boris & Schmid, Lukas & Steri, Roberto, 2019. "Dynamic corporate liquidity," Journal of Financial Economics, Elsevier, vol. 132(1), pages 76-102.
    • Handle: RePEc:eee:jfinec:v:132:y:2019:i:1:p:76-102
    DOI: 10.1016/j.jfineco.2017.06.018
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    2. Ricci, Lorenzo & Soggia, Giovanni & Trimarchi, Lorenzo, 2023. "The impact of bank lending standards on credit to firms," Journal of Banking & Finance, Elsevier, vol. 152(C).
    3. Aydin, Deniz & Kim, Olivia S., 2024. "Precautionary Debt Capacity," EconStor Preprints 281672, ZBW - Leibniz Information Centre for Economics.
    4. Nikolov, Boris & Schmid, Lukas & Steri, Roberto, 2021. "The Sources of Financing Constraints," Journal of Financial Economics, Elsevier, vol. 139(2), pages 478-501.
    5. Geelen, Thomas & Hajda, Jakub & Morellec, Erwan & Winegar, Adam, 2024. "Asset life, leverage, and debt maturity matching," Journal of Financial Economics, Elsevier, vol. 154(C).
    6. Favara, Giovanni & Gao, Janet & Giannetti, Mariassunta, 2021. "Uncertainty, access to debt, and firm precautionary behavior," Journal of Financial Economics, Elsevier, vol. 141(2), pages 436-453.
    7. Albertus, James F. & Glover, Brent & Levine, Oliver, 2022. "Foreign investment of US multinationals: The effect of tax policy and agency conflicts," Journal of Financial Economics, Elsevier, vol. 144(1), pages 298-327.
    8. Priit Jeenas, 2023. "Firm Balance Sheet Liquidity, Monetary Policy Shocks, and Investment Dynamics," Working Papers 1409, Barcelona School of Economics.
    9. Chodorow-Reich, Gabriel & Darmouni, Olivier & Luck, Stephan & Plosser, Matthew, 2022. "Bank liquidity provision across the firm size distribution," Journal of Financial Economics, Elsevier, vol. 144(3), pages 908-932.
    10. Min Dai & Xavier Giroud & Wei Jiang & Neng Wang, 2020. "A q Theory of Internal Capital Markets," NBER Working Papers 27931, National Bureau of Economic Research, Inc.
    11. Campello, Murillo & Connolly, Robert A. & Kankanhalli, Gaurav & Steiner, Eva, 2022. "Do real estate values boost corporate borrowing? Evidence from contract-level data," Journal of Financial Economics, Elsevier, vol. 144(2), pages 611-644.
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    13. Antonio Falato & Dalida Kadyrzhanova & Jae Sim & Roberto Steri, 2022. "Rising Intangible Capital, Shrinking Debt Capacity, and the U.S. Corporate Savings Glut," Journal of Finance, American Finance Association, vol. 77(5), pages 2799-2852, October.
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    16. Sarkar, Sudipto & Zhang, Chuanqian, 2020. "Investment and financing decisions with learning-curve technology," Journal of Banking & Finance, Elsevier, vol. 121(C).

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    More about this item

    Keywords

    Cash; Credit lines; Collateral; Covenants; Structural estimation;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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