RFS Advance Access originally published online on January 31, 2007
Review of Financial Studies 2009 22(3):1057-1088; doi:10.1093/revfin/hhm007
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Bank Lines of Credit in Corporate Finance: An Empirical Analysis
University of Chicago
Address correspondence to Amir Sufi, University of Chicago, Graduate School of Business, 5807 South Woodlawn Avenue, Chicago, IL 60637. E-mail: amir.sufi{at}chicagogsb.edu
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Abstract |
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I empirically examine the factors that determine whether firms use bank lines of credit or cash in corporate liquidity management. I find that bank lines of credit, also known as revolving credit facilities, are a viable liquidity substitute only for firms that maintain high cash flow. In contrast, firms with low cash flow are less likely to obtain a line of credit, and they rely more heavily on cash in their corporate liquidity management. An important channel for this correlation is the use of cash flow-based financial covenants by banks that supply credit lines. I find that firms must maintain high cash flow to remain compliant with covenants, and banks restrict firm access to credit facilities in response to covenant violations. Using the cash-flow sensitivity of cash as a measure of financial constraints, I provide evidence that lack of access to a line of credit is a more statistically powerful measure of financial constraints than traditional measures used in the literature.
I thank Heitor Almeida, Murillo Campello, Douglas Diamond, Michael Faulkender, Mark Flannery, Christopher James, Anil Kashyap, Aziz Lookman, David Matsa, Francisco Perez-Gonzalez, Mitchell Petersen, James Poterba, Joshua Rauh, Antoinette Schoar, Jeremy Stein, Philip Strahan, and Peter Tufano for helpful comments and discussion. I also thank Ali Bajwa and James Wang for helping with computer programs that made this article possible. This work benefited greatly from discussions with the seminar participants at the Federal Reserve Bank of New York (Banking Studies), the University of Rochester (Simon), the University of Florida (Warrington), the FDIC Center for Financial Research Workshop, Washington University (Olin), the NBER Corporate Finance meeting, and the Western Finance Association annual meeting. I gratefully acknowledge financial support from the FDIC's Center for Financial Research.
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