Precautionary Debt Capacity

60 Pages Posted: 29 Jan 2024

See all articles by Deniz Aydin

Deniz Aydin

Washington University in St. Louis - John M. Olin Business School

Olivia Kim

Harvard Business School

Date Written: January 19, 2024

Abstract

Firms with ample financial slack are unconstrained... or are they? In a field experiment that randomly expands debt capacity on business credit lines, treated small-and-medium enterprises (SMEs) draw down 55 cents on the dollar of expanded debt capacity in the long-run and increase total debt, investment, sales, and profits by $2.02, $1.83, $7.19, and $3.90 on the dollar, respectively. SMEs with debt levels farthest below their borrowing capacity before the intervention display sizable treatment effects. The likelihood of financial distress in negative cash flow events is reduced for treated firms. Additional analyses support SMEs’ precautionary motive to preserve financial flexibility.

Suggested Citation

Aydin, Deniz and Kim, Olivia, Precautionary Debt Capacity (January 19, 2024). Olin Business School Center for Finance & Accounting Research Paper No. 2024/01, Available at SSRN: https://ssrn.com/abstract=4700903 or http://dx.doi.org/10.2139/ssrn.4700903

Deniz Aydin

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
St. Louis, MO 63130
United States

HOME PAGE: http://sites.wustl.edu/denizaydin

Olivia Kim (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Boston, MA 02163
United States

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