Weathering Cash Flow Shocks

68 Pages Posted: 5 May 2017 Last revised: 26 Jan 2020

See all articles by James R. Brown

James R. Brown

Iowa State University - Department of Finance

Matthew Gustafson

Pennsylvania State University - Smeal College of Business

Ivan Ivanov

Board of Governors of the Federal Reserve System

Date Written: January 14, 2020

Abstract

Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank-borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower-friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the non-fundamental component of cash flow volatility, especially for solvent small bank borrowers.

JEL Classification: G32

Suggested Citation

Brown, James R. and Gustafson, Matthew and Ivanov, Ivan, Weathering Cash Flow Shocks (January 14, 2020). Available at SSRN: https://ssrn.com/abstract=2963444 or http://dx.doi.org/10.2139/ssrn.2963444

James R. Brown

Iowa State University - Department of Finance ( email )

Ivy College of Business
Ames, IA 50011
United States
5152944668 (Phone)

Matthew Gustafson

Pennsylvania State University - Smeal College of Business ( email )

East Park Avenue
University Park, PA 16802
United States

Ivan Ivanov (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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