Journal Article

Bank Lines of Credit in Corporate Finance: An Empirical Analysis

Sufi, Amir

2009

Overview

I empirically examine the factors that determine whether firms use bank lines of credit or cash in corporate liquidity management. I find that bank lines of credit, also known as revolving credit facilities, are a viable liquidity substitute only for firms that maintain high cash flow. In contrast, firms with low cash flow are less likely to obtain a line of credit, and they rely more heavily on cash in their corporate liquidity management. An important channel for this correlation is the use of cash flow-based financial covenants by banks that supply credit lines. I find that firms must maintain high cash flow to remain compliant with covenants, and banks restrict firm access to credit facilities in response to covenant violations. Using the cash-flow sensitivity of cash as a measure of financial constraints, I provide evidence that lack of access to a line of credit is a more statistically powerful measure of financial constraints than traditional measures used in the literature.

• Publisher: Oxford University Press,Oxford Publishing Limited (England)
• Subject: Access / Access to credit / Acid test ratios / Annual reports / Bank liquidity / Banking / Banks / Capital markets / Cash flow / Companies / Constraints / Corporate finance / Covenants / Credit / Datasets / Lines of credit / Liquidity / Loan agreements / Rating services / Revolving credit / Standard deviation / Studies / Violations