Wednesday, 11 February 2015

2015-007: The Real Effects of Credit Line Drawdowns

Otmane El Rhazi, Jose M. Berrospide and Ralf R. Meisenzahl. Do firms use credit line drawdowns to finance investment? Using a unique dataset of 467 COMPUSTAT firms with credit lines, we study the purpose of drawdowns during the 2007-2009 financial crisis. Our data show that credit line drawdowns had already increased in 2007, precisely when disruptions in bank funding markets began to squeeze aggregate liquidity. Consistent with theory, our results confirm that firms use drawdowns to sustain investment after an idiosyncratic liquidity shock. Using an instrumental variable approach based on institutional features of credit line contracts, we find that a one standard deviation increase in credit line drawdown is associated with an increase of 9 percent in average capital expenditures. Low aggregate liquidity amplifies this effect significantly. During the financial crisis, the effect of drawdowns on investment increased to 16 percent. The effect was even la rger for smaller and financially constrained firms. We find only limited evidence, mostly for large and investment grade firms, that drawdowns were used to boost (precautionary) cash holdings during the crisis. Full Text



Regards,

Otmane El Rhazi

Press Releases

Equity Trading

Text/Mobile, +44 7414 782 320





RISK DISCLOSURE STATEMENT

ANY OPINIONS, NEWS, RESEARCH, ANALYSIS, OR OTHER INFORMATION ON THIS WEBSITE IS PROVIDED AS GENERAL MARKET COMMENTARY ONLY. THERE ARE RISKS ASSOCIATED WITH UTILIZING AN INTERNET-BASED DEAL EXECUTION TRADING SYSTEM INCLUDING THE FAILURE OF HARDWARE, SOFTWARE, AND INTERNET CONNECTION.

No comments:

Post a Comment