The Impact of Credit Line Drawdowns on Investment Evidence from the Financial Crisis
50 Pages Posted: 25 Jul 2016 Last revised: 27 Jul 2016
Date Written: October 18, 2015
Abstract
Using a unique dataset of credit line drawdowns and liquidity hedging, we study the relation between credit line usage and corporate investment. In line with theoretical predictions that credit lines aid firms to invest during times of limited credit availability, our findings reveal that the liquidity insurance function of lines of credit does facilitate the undertaking of value-enhancing investments during severe credit market conditions. Although the financial crisis did reduce firm investment, this effect was mitigated somewhat by credit line usage. We also find that in contrast to non-crisis times, during the crisis older, higher net worth firms were more likely to have access to credit lines. Similarly, firms with a higher firm value and bond rating were more likely to have extensive credit line drawdowns during the crisis than non-crisis years.
Keywords: Credit Line Drawdowns, Investment, Financial Crisis
JEL Classification: G21, G31, G32, E22
Suggested Citation: Suggested Citation