Competition and Corporate Liquidity Management
Posted: 21 Jun 2022
Date Written: April 29, 2020
Abstract
Cash holdings and bank credit lines are the main sources of corporate liquidity. Similar to the prediction for cash holdings, theory predicts that when facing more intense product market competition, a firm should use more credit lines. The liquidity provided by a credit line allows a firm to make more credible threats to competitors and to capture investment opportunities before competitors do. Our empirical findings, however, show that competition decreases, rather than increases, the use of credit lines. This finding is robust to alternative measures of competition and exogenous variation in competition. The reduction in credit line usage is not driven by reduced demand for credit lines, but rather by more restricted supply, because competition-induced negative pressure on firm performance makes obtaining a credit line more difficult.
Keywords: Competition, lines of credit, corporate liquidity, cash, fluidity
Suggested Citation: Suggested Citation
Xunhua Su (Contact Author)
NHH Norwegian School of Economics ( email )
Helleveien 30
Bergen, NO-5045
Norway
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