Credit Lines and the Substitutability of Cash and Debt
Mark J. Flannery
University of Florida - Department of Finance, Insurance and Real Estate
G. Brandon Lockhart
Clemson University - Department of Finance
September 2, 2009
We analyze credit line characteristics and changes in cash for a panel of firms over 1996-2006, and find evidence consistent with the economic importance of transactions costs for the management of liquidity and the resulting effects on shareholder value. We find that shareholders of financially-unconstrained firms value credit line availability and cash holdings similarly. Financially-constrained firms can increase firm value by increasing cash and credit line debt by the same amount, consistent with the theory of Gamba and Triantis (2007). The results provide strong evidence that transactions costs shape financial policy, and that shareholders benefit from low-fixed-cost access to liquidity.
Number of Pages in PDF File: 52
Keywords: Credit line, revolver, cash holdings, transactions costs, negative debt, flexibility
JEL Classification: G14, G30, G32, G35working papers series
Date posted: June 20, 2009 ; Last revised: September 6, 2009
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