Agency Costs and Corporate Liquidity Demand: Evidence from Bank Loan Commitment Usage during the Financial Crisis
40 Pages Posted: 11 Aug 2010 Last revised: 28 Jan 2017
Date Written: January 27, 2017
Using a large contract-level, high frequency database of bank loan commitments from June 2007 to May 2009, we find that firms' takedown behavior regarding credit lines is very dierent depending on the firms' creditworthiness. Usage patterns of rms with poor credit quality are more closely associated with credit spreads, a measure of market liquidity level. Meanwhile, those of rms with good credit quality are more closely related to the market interest rates, a key determinant of cost of using loan commitments. This contrast suggests that the availability of funds is more important than the cost of funds for rms with limited access to external financing. We discuss this finding's implications for the bank lending channel and procyclical bank regulatory capital.
Keywords: loan commitments, flight to quality, business cycles
JEL Classification: E40, E44, G21
Suggested Citation: Suggested Citation