Lines of Credit, Two-Player External Liquidity

54 Pages Posted:

See all articles by Zhanbing Xiao

Zhanbing Xiao

The University of British Columbia

Zhongyan Zhu

Monash University

Date Written: February 19, 2021

Abstract

We propose a two-player game under the pecking order framework to model credit line realization. A firm and a bank make sequential decisions, and each has two choices. Firms with sufficient internal liquidity won’t apply in the first place. Banks selectively reject submitted applications on concerns that borrowers can’t service drawdown interest rate payments or principal repayment. The empirical analysis investigates both normal times and a crisis period. In normal times, credit line contracts add liquidity capacity when the cash holdings may be insufficient to address unexpected cash flow shocks. In the 2008 crisis, drawdowns confirm an independent demand-side story.

Keywords: total liquidity management, cash holdings, cash flows, lines of credit, demand-side shock

JEL Classification: G21, G30

Suggested Citation

Xiao, Zhanbing and Zhu, Zhongyan, Lines of Credit, Two-Player External Liquidity (February 19, 2021). Available at SSRN: https://ssrn.com/abstract=

Zhanbing Xiao

The University of British Columbia ( email )

Vancouver, British Columbia
Canada

HOME PAGE: http://www.zhanbingxiao.com

Zhongyan Zhu (Contact Author)

Monash University ( email )

Melbourne
Australia

HOME PAGE: http://sites.google.com/site/zhougyanzhu/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
2
Abstract Views
16
PlumX Metrics