Why did Firms Draw Down their Credit Lines during the COVID-19 Shutdown?

71 Pages Posted: 23 Sep 2020 Last revised: 27 Apr 2021

See all articles by Joshua Bosshardt

Joshua Bosshardt

Federal Housing Finance Agency

Ali Kakhbod

University of California, Berkeley

Date Written: April 27, 2021


The economic shutdown associated with the COVID-19 pandemic witnessed a surge in drawdowns on pre-existing credit lines. This paper examines how this liquidity was used by firms. Drawdowns were associated with an immediate accumulation of liquid assets followed by a depletion of this liquidity as the U.S. economy stabilized after the spring of 2020. Drawdowns were generally not associated with greater levels of physical investment or employment either immediately after the drawdowns or several months later. Rather, the depletion of liquidity is simultaneous with an increase in the equity to assets ratio, consistent with repayments of the drawdowns. These facts are consistent with the idea that firms drew down their credit lines due to a precautionary motive to mitigate future liquidity risk until the economy started to stabilize. However, we find evidence that firms in industries that were less affected by the shutdown, such as professional services that can be performed remotely, were relatively more likely to use drawdowns to maintain investment rather than accumulate liquidity. On the intensive margin, this is especially true for firms in such industries that drew a relatively small amount of funds.

Keywords: credit lines, COVID-19, liquidity, investment

JEL Classification: G01, G11

Suggested Citation

Bosshardt, Joshua and Kakhbod, Ali, Why did Firms Draw Down their Credit Lines during the COVID-19 Shutdown? (April 27, 2021). Available at SSRN: https://ssrn.com/abstract=3696981 or http://dx.doi.org/10.2139/ssrn.3696981

Joshua Bosshardt

Federal Housing Finance Agency ( email )

400 7th Street SW
Washington, DC 20552
United States

Ali Kakhbod (Contact Author)

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

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