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Dynamic Credit Constraints: Theory and Evidence from Credit Lines

Author

Listed:
  • Amberg, Niklas

    (Research Department, Central Bank of Sweden)

  • Jacobson, Tor

    (Research Department, Central Bank of Sweden)

  • Quadrini, Vincenzo

    (University of Southern California, Marshall School of Business)

  • Rogantini Picco, Anna

    (Research Department, Central Bank of Sweden)

Abstract

We use a comprehensive Swedish credit register to document that firms throughout the size distribution have access to fairly large and reasonably priced credit lines, but borrow relatively little from them. We rationalize this using a theoretical framework in which the expected cost of financial distress increases with current borrowing and lower credit-line utilization reflects tighter ‘dynamic’ credit constraints. Consistently with the predictions of the model, the data shows that there is a negative relation between firm-level uncertainty and credit-line utilization. We also find that firms increase borrowing in response to credit-limit increases, even when their current debt is far from the limit.

Suggested Citation

  • Amberg, Niklas & Jacobson, Tor & Quadrini, Vincenzo & Rogantini Picco, Anna, 2023. "Dynamic Credit Constraints: Theory and Evidence from Credit Lines," Working Paper Series 422, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0422
    as

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    File URL: https://www.riksbank.se/globalassets/media/rapporter/working-papers/2023/no.-422-dynamic-credit-constraints-theory-and-evidence-from-credit-lines.pdf
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    References listed on IDEAS

    as
    1. Mark Gertler & Simon Gilchrist, 1994. "Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(2), pages 309-340.
    2. David B. Gross & Nicholas S. Souleles, 2002. "Do Liquidity Constraints and Interest Rates Matter for Consumer Behavior? Evidence from Credit Card Data," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(1), pages 149-185.
    3. Degryse, Hans & De Jonghe, Olivier & Jakovljević, Sanja & Mulier, Klaas & Schepens, Glenn, 2019. "Identifying credit supply shocks with bank-firm data: Methods and applications," Journal of Financial Intermediation, Elsevier, vol. 40(C).
    4. Abhijit V. Banerjee & Esther Duflo, 2014. "Do Firms Want to Borrow More? Testing Credit Constraints Using a Directed Lending Program," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 572-607.
    5. Viral V Acharya & Sascha Steffen, 2020. "The Risk of Being a Fallen Angel and the Corporate Dash for Cash in the Midst of COVID," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 9(3), pages 430-471.
    6. repec:bla:jfinan:v:59:y:2004:i:4:p:1777-1804 is not listed on IDEAS
    7. Roberts, Michael R. & Sufi, Amir, 2009. "Renegotiation of financial contracts: Evidence from private credit agreements," Journal of Financial Economics, Elsevier, vol. 93(2), pages 159-184, August.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Credit constraints; banks; uncertainty; credit lines; precautionary behavior;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • 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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