Abstract
Motivated by a debate on the effect of debt on firms’ product market performance, I examine the effect of lines of credit on firms’ future profits. Consistent with the notion that lines of credit provide firms with unique financial flexibility and enhance their strategic position within the industry, I find evidence that the acquisition of lines of credit increases firms’ future profit. This value-enhancing effect is more pronounced in more competitive industries. I also find that for firms in more competitive industries, fewer lines of credit are acquired per firm both in terms of the number and dollar amount of the lines of credit acquired, although the aggregate industry use is higher. Moreover, lines of credit carry less favorable contract terms when the borrowing firms are from more competitive industries in terms of higher loan rates, lower loan amounts and more stringent collateral requirements.
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