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Credit Lines: The Other Side of Corporate Liquidity

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  • Filippo Ippolito
  • Ander Pérez Orive

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.

Suggested Citation

  • Filippo Ippolito & Ander Pérez Orive, 2012. "Credit Lines: The Other Side of Corporate Liquidity," Working Papers 618, Barcelona School of Economics.
    • Handle: RePEc:bge:wpaper:618
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    Cited by:

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    2. Lee, Jiyoon, 2022. "Do firms use credit lines to support investment opportunities?: Evidence from success in R&D," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 1-14.
    3. Memmel, Christoph & Gündüz, Yalin & Raupach, Peter, 2015. "The common drivers of default risk," Journal of Financial Stability, Elsevier, vol. 16(C), pages 232-247.
    4. Vincenzo Quadrini & Qi Sun, 2018. "Credit and Firm-Level Volatility of Employment," Journal of the European Economic Association, European Economic Association, vol. 16(5), pages 1433-1475.

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    More about this item

    Keywords

    cash holdings; credit lines; lines of credit; revolving credit facilities; trade-off theory; liquidity; Financial constraints; covenants;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis

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