Abstract

http://ssrn.com/abstract=2022279
 
 

Citations (1)



 


 



Credit Lines as Monitored Liquidity Insurance: Theory and Evidence


Viral V. Acharya


New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Heitor Almeida


University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Filippo Ippolito


Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Centre for Economic Policy Research (CEPR)

Ander Perez


Universitat Pompeu Fabra; Barcelona Graduate School of Economics (Barcelona GSE)

January 12, 2013

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
We propose and test a theory of corporate liquidity management in which credit lines provided by banks to firms are a form of monitored liquidity insurance. Bank monitoring and resulting credit line revocations help control illiquidity-seeking behavior by firms. Firms with high liquidity risk are likely to use cash rather than credit lines for liquidity management because the cost of monitored liquidity insurance increases with liquidity risk. We exploit a quasi-experiment around the downgrade of General Motors (GM) and Ford in 2005 and find that firms that experienced an exogenous increase in liquidity risk (specifically, firms that relied on bonds for financing in the pre-downgrade period) moved out of credit lines and into cash holdings in the aftermath of the downgrade. We observe a similar effect for firms whose ability to raise equity financing is compromised by pricing pressure caused by mutual fund redemptions. Finally, we find support for the model's other novel empirical implication that firms with low hedging needs (high correlation between cash flows and investment opportunities) are more likely to use credit lines relative to cash, and are also less likely to face covenants and revocations when using credit lines.

Number of Pages in PDF File: 61

Keywords: Liquidity management, cash holdings, liquidity risk, hedging, covenants, loan commitments, credit line revocation

JEL Classification: G21, G31, G32, E22, E5

Accepted Paper Series


Download This Paper

Date posted: March 21, 2012 ; Last revised: April 15, 2013

Suggested Citation

Acharya, Viral V. and Almeida, Heitor and Ippolito, Filippo and Perez, Ander, Credit Lines as Monitored Liquidity Insurance: Theory and Evidence (January 12, 2013). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=2022279 or http://dx.doi.org/10.2139/ssrn.2022279

Contact Information

Viral V. Acharya (Contact Author)
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Heitor Almeida
University of Illinois at Urbana-Champaign ( email )
515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)
HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Filippo Ippolito
Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )
Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
Ander Perez
Universitat Pompeu Fabra ( email )
Ramon Trias Fargas, 25
Barcelona, 08005
Spain
+34935421180 (Phone)
HOME PAGE: http://www.econ.upf.edu/~aperez/
Barcelona Graduate School of Economics (Barcelona GSE) ( email )
Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain
Feedback to SSRN


Paper statistics
Abstract Views: 1,528
Downloads: 310
Download Rank: 51,887
Citations:  1
People who downloaded this paper also downloaded:
1. Credit Lines and the Substitutability of Cash and Debt
By Mark Flannery and G. Lockhart

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.313 seconds