Working Paper: NBER ID: w16309
Authors: Murillo Campello; Erasmo Giambona; John R. Graham; Campbell R. Harvey
Abstract: This paper uses a unique dataset to study how firms managed liquidity during the financial crisis. Our analysis provides new insights on the interactions between internal liquidity, external funds, and real corporate decisions, such as investment and employment. We first describe how companies used credit lines during the crisis (access, size of facilities, and drawdown activity), the conditions under which these facilities were granted (fees, markups, maturity, and collateral), and whether managers had difficulties in renewing or initiating lines. We also describe the dynamics of credit line violations and the outcome of subsequent renegotiations. We show how companies substitute between credit lines and internal liquidity (cash and profits) when facing a severe credit shortage. Looking at real-side decisions, we find that credit lines are associated with greater spending when companies are not cash-strapped. Firms with limited access to credit lines, on the other hand, appear to choose between saving and investing during the crisis. Our evidence indicates that credit lines eased the impact of the financial crisis on corporate spending.
Keywords: liquidity management; corporate investment; financial crisis; credit lines
JEL Codes: E32; G31; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| credit lines (G21) | corporate spending (G34) |
| internal liquidity (E41) | usage of credit lines (G21) |
| cash holdings (E41) | investment plans (G11) |
| cash flows (G19) | usage of credit lines (G21) |
| credit line access (G21) | corporate spending (G34) |
| credit line violations (H81) | liquidity management strategies (G33) |