Credit Lines and the Substitutability of Cash and Debt

52 Pages Posted: 20 Jun 2009 Last revised: 6 Sep 2009

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

G. Brandon Lockhart

Clemson University - Department of Finance

Date Written: September 2, 2009

Abstract

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.

Keywords: Credit line, revolver, cash holdings, transactions costs, negative debt, flexibility

JEL Classification: G14, G30, G32, G35

Suggested Citation

Flannery, Mark Jeffrey and Lockhart, G. Brandon, Credit Lines and the Substitutability of Cash and Debt (September 2, 2009). Available at SSRN: https://ssrn.com/abstract=1422867 or http://dx.doi.org/10.2139/ssrn.1422867

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

G. Brandon Lockhart (Contact Author)

Clemson University - Department of Finance ( email )

Clemson, SC 29634
United States

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