STRATEGIC CREDIT LINE USAGE AND PERFORMANCE
Abstract
The existing literature views credit line drawdowns as a quick, low‐cost way for a firm to access cash for immediate needs when facing a liquidity shock. We investigate whether firms use credit lines strategically to accumulate precautionary balances in anticipation of performance declines. We show that unexpected drawdowns, measured as the residual from a predictive regression of drawdowns, predict increases in cash balances, future cash flow declines, and future covenant violations. Firms with unexpected drawdowns see less favorable terms in renegotiations than firms without unexpected drawdowns but they are better able to finance future capital expenditures following a covenant violation.
Faculty Members
- Atay Kizilaslan - Cornerstone Research New York City
- Ani Manakyan Mathers - Salisbury University
Themes
- Financial performance
- Covenant violations
- Credit line utilization
- Liquidity management
- Capital expenditures