Liquidity Management and Corporate Investment During a Financial Crisis

48 Pages Posted: 7 Aug 2009 Last revised: 21 Nov 2010

Murillo Campello

Cornell University; National Bureau of Economic Research (NBER)

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

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); Duke Innovation & Entrepreneurship Initiative

Multiple version iconThere are 2 versions of this paper

Date Written: November 19, 2010

Abstract

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.

Keywords: Financial crisis, liquidity management, investment spending, credit lines, drawdown activity, cash savings

JEL Classification: G31, G32

Suggested Citation

Campello, Murillo and Giambona, Erasmo and Graham, John R. and Harvey, Campbell R., Liquidity Management and Corporate Investment During a Financial Crisis (November 19, 2010). Available at SSRN: https://ssrn.com/abstract=1444009 or http://dx.doi.org/10.2139/ssrn.1444009

Murillo Campello (Contact Author)

Cornell University ( email )

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HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

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Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

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Syracuse, NY 13244-2450
United States
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John Robert Graham

Duke University ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7857 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Campbell R. Harvey

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Duke Innovation & Entrepreneurship Initiative ( email )

215 Morris St., Suite 300
Durham, NC 27701
United States

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