Liquidity Management and Corporate Investment During a Financial Crisis
Cornell University; National Bureau of Economic Research (NBER)
University of Amsterdam - Finance Group; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)
John R. Graham
Duke University; National Bureau of Economic Research (NBER)
Campbell R. Harvey
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
November 19, 2010
This paper uses a unique dataset to study how firms managed liquidity during the 2008-09 financial crisis. Our analysis provides new insights on interactions between internal liquidity, external funds, and real corporate decisions, such as investment and employment. We first describe how companies used credit lines during the crisis (access, size of facilities, and drawdown activity), the characteristics of these facilities (fees, markups, maturity, and collateral), and whether managers had difficulties in renewing or initiating lines. We also describe the dynamics of credit line violations and the outcome of subsequent renegotiations. We show how companies substitute between credit lines and internal liquidity (cash and profits) when facing a severe credit shortage. Looking at real-side decisions, we find that credit lines are associated with greater spending when companies are not cash-strapped. Firms with limited access to credit lines, on the other hand, appear to choose between saving and investing during the crisis. Our evidence indicates that credit lines eased the impact of the financial crisis on corporate spending.
Number of Pages in PDF File: 48
Keywords: Financial crisis, liquidity management, investment spending, credit lines, drawdown activity, cash savings
JEL Classification: G31, G32
Date posted: August 7, 2009 ; Last revised: November 21, 2010
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