Credit Lines: The Other Side of Corporate Liquidity

Posted: 16 Feb 2012 Last revised: 17 Feb 2012

See all articles by Filippo Ippolito

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences; Barcelona Graduate School of Economics; Centre for Economic Policy Research (CEPR)

Ander Perez-Orive

Federal Reserve Board

Date Written: February 14, 2012


In this paper we offer the first large sample evidence on the availability and usage of credit lines in U.S. public corporations and use it to re-examine the existing findings on corporate liquidity. We show that the availability of credit lines is widespread and that average undrawn credit is of the same order of magnitude as cash holdings. We test the trade-off theory of liquidity according to which firms target an optimum level of liquidity, computed as the sum of cash and undrawn credit lines. We provide support for the existence of a liquidity target, but also show that the reasons why firms hold cash and credit lines are very different. While the precautionary motive explains well cash holdings, the optimum level of credit lines appears to be driven by the restrictions imposed by the credit line itself, in terms of stated purpose and covenants. In support to these findings, credit line drawdowns are associated with capital expenditures, acquisitions, and working capital.

Keywords: Cash Holdings, Undrawn Credit, Liquidity, Financial Constraints

JEL Classification: G30, G31, D22

Suggested Citation

Ippolito, Filippo and Perez-Orive, Ander, Credit Lines: The Other Side of Corporate Liquidity (February 14, 2012). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: or

Filippo Ippolito

Universitat Pompeu Fabra - Faculty of Economic and Business Sciences ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
(+34) 93 542 2578 (Phone)
(+34) 93 542 1746 (Fax)

Barcelona Graduate School of Economics ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Ander Perez-Orive (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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