Credit lines as monitored liquidity insurance: Theory and evidence

Viral Acharya, Heitor Almeida, Filippo Ippolito, Ander Perez

Research output: Contribution to journalArticlepeer-review

Abstract

We propose a theory of credit lines provided by banks to firms as a form of monitored liquidity insurance. Bank monitoring and resulting revocations help control illiquidity-seeking behavior of firms insured by credit lines. The cost of credit lines is thus greater for firms with high liquidity risk, which in turn are likely to use cash instead of credit lines. We test this implication for corporate liquidity management by identifying exogenous shocks to liquidity risk of firms in corporate bond and equity markets. Firms experiencing increases in liquidity risk move out of credit lines and into cash holdings.

Original languageEnglish (US)
Pages (from-to)287-319
Number of pages33
JournalJournal of Financial Economics
Volume112
Issue number3
DOIs
StatePublished - Jun 2014

Keywords

  • Cash holdings
  • Covenants
  • Credit line revocation
  • Hedging
  • Liquidity management
  • Liquidity risk
  • Loan commitments

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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