External Financing of Last Resort? Bank Lines of Credit as a Source of Long-Term Finance

80 Pages Posted: 4 Oct 2015 Last revised: 3 Aug 2019

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Yunling Chen

Tsinghua University - Department of Finance

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Date Written: June 25, 2019

Abstract

We find credit line drawdowns are an important source of long-term finance for capital expenditures and acquisitions for all but the highest rated firms. Unrated and to a lesser extent intermediate-rated firms draw down credit lines most frequently when capital market conditions are unfavorable. Firms repay long-term credit line drawdowns relatively quickly, with 2/3rd of drawdowns being repaid within 2 years, while other sources of long-term debt financing are substituted. Tighter covenants in credit line are one major reason firms repay credit lines as market conditions improve. In this way, long term credit lines act like a bridge financing mechanism.

Keywords: Lines of Credit, Financing of Last Resort, Liquidity Buffer, Long term financing

JEL Classification: G21, G31, G32

Suggested Citation

Chang, Xin and Chen, Yunling and Dasgupta, Sudipto and Masulis, Ronald W., External Financing of Last Resort? Bank Lines of Credit as a Source of Long-Term Finance (June 25, 2019). Available at SSRN: https://ssrn.com/abstract=2669076 or http://dx.doi.org/10.2139/ssrn.2669076

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Yunling Chen

Tsinghua University - Department of Finance ( email )

Tsinghua University
Beijing, 100084
China
86-10-62798631 (Phone)

Sudipto Dasgupta

Chinese University of Hong Kong and CEPR ( email )

CUHK, Cheng Yu Tung Building, Room 1224
Shatin, NT
Hong Kong
Hong Kong

Ronald W. Masulis (Contact Author)

University of New South Wales, Sydney ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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