Customer Risk and the Choice between Cash and Bank Credit Lines

58 Pages Posted: 14 Feb 2018 Last revised: 26 Feb 2020

See all articles by Thomas David

Thomas David

ESCP Europe - Department of Finance

Date Written: February 7, 2020

Abstract

I use a matched buyer-supplier sample of U.S. industrial firms to investigate the impact of customer risk on suppliers' choice between cash and credit lines. I show that customer risk decreases the reliance on bank-managed liquidity insurance relative to cash. I also find evidence indicating that firms actively shy away from credit lines in response to customer risk in order to maximize the future availability of their liquidity reserves. Consistently, my findings suggest that high-customer-risk firms are particularly more likely to be subject to (stricter) borrowing base provisions, which tie the value of a credit line to that of eligible collateral (notably accounts receivable). I also find that steeper credit line spreads alone cannot explain firms' response to customer risk. These results highlight how customer-supplier relationships affect the precautionary demand for liquidity, and significantly shape corporate financial decisions.

Keywords: Customer Risk, Lines of Credit, Cash Management, Precautionary Motive

JEL Classification: G30, G32

Suggested Citation

David, Thomas, Customer Risk and the Choice between Cash and Bank Credit Lines (February 7, 2020). Available at SSRN: https://ssrn.com/abstract=3116790 or http://dx.doi.org/10.2139/ssrn.3116790

Thomas David (Contact Author)

ESCP Europe - Department of Finance ( email )

79 Avenue de la République
Paris, 75011
France

HOME PAGE: http://www.thomasdavid.org/

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