Credit Lines, Two-Player Standby Liquidity

60 Pages Posted: 25 Feb 2021 Last revised: 1 Nov 2021

See all articles by Zhanbing Xiao

Zhanbing Xiao

The University of British Columbia

Zhongyan Zhu

Monash University

Date Written: August 31, 2021


We add stochastic cash flows to an entrepreneur's business operations and propose a two-player game to model credit line realization. Firms and banks make sequential decisions. Firms with sufficient internal liquidity won’t request credit lines. Banks selectively reject submitted requests because borrowers’ cash flows and collateral are of concern. The empirical analysis investigates contract realization and drawdown variations. Credit lines are standby external liquidity for firms with insufficient cash holdings. In the 2008 crisis, drawdowns confirm an independent demand-side story. Together, our study offers a unifying explanation of the interplay between internal and external resources in corporate liquidity management.

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, Credit Lines, Two-Player Standby Liquidity (August 31, 2021). Available at SSRN: or

Zhanbing Xiao

The University of British Columbia ( email )

Vancouver, British Columbia


Zhongyan Zhu (Contact Author)

Monash University ( email )

Department of Banking and Finance
Caufield East, Victoria 3145
61-3-9903-4546 (Phone)


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