Abstract
A substantial literature treats credit lines as a form of committed liquidity insurance. We provide evidence that challenges this perspective. Borrowing rates hold for a relatively short period of time and firms that draw on a line of credit face higher interest rates and more stringent contract terms upon renewal than do similar firms that did not draw on credit lines. Moreover, banks have considerable capacity for forcing renegotiation and thereby limiting a firm’s benefit from drawing on a credit line. As a consequence, firms that rely heavily on credit lines for liquidity insurance may forgo positive NPV projects. We find that bank reputation and prior lending relationships improve the efficiency of credit lines.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
