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 language | English (US) |
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Pages (from-to) | 287-319 |
Number of pages | 33 |
Journal | Journal of Financial Economics |
Volume | 112 |
Issue number | 3 |
DOIs | |
State | Published - 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