Bank Credit Lines Research Articles

Empirical Analysis of Corporate Credit Lines

Since bank credit lines are a major source of corporate funding, we examine the determinants of credit line usage with a comprehensive database of Spanish corporate credit lines. A line�s default status is a key factor driving its usage, which increases as a firm�s financial condition worsens. Line usage decreases by roughly 10% for each year of its life. Lender characteristics, such as the number and length of a firm�s banking relationships, are found to affect a firm�s usage decisions, and credit line usage is found to be inversely related to macroeconomic conditions

Cash Flow Hedging and Liquidity Choices

This paper studies the interaction between corporate hedging and liquidity policies. We present a theoretical model that shows how corporate hedging facilitates greater reliance on cost-effective, externally-provided liquidity in lieu of internal resources. We test the model's predictions by employing a new empirical approach that separates cash flow hedging from other hedging instruments. Using detailed, hand-collected data, we find that cash flow hedging reduces the firm’s precautionary demand for cash and allows it to rely more on bank lines of credit. Furthermore, we find a significant positive effect of cash flow hedging on firm value, where prior evidence is mixed.

Bank Lending Standards and Access to Lines of Credit

This paper examines how changes in bank lending standards are related to the availability of bank lines of credit for private and comparable public firms. Overall, we find that access to lines of credit is more contingent on bank lending standards for private than for public firms. The impact of bank lending standards is however asymmetric: While private firms are less likely than public firms to gain access to new lines when credit market conditions are tight, we find no difference between public and private firms in terms of their use or retention of pre-existing lines. We also find that private firms without lines of credit use more trade credit when bank lending standards are tight, which is suggestive of a supply effect. Overall, the evidence suggests that “credit crunches” are likely to have a disproportionate impact on private firms. However, pre-existing banking relationships appear to mitigate the impact of these contractions on private firms.

Why Do Firms Use Commercial Paper?

We analyze why firms use non-intermediated short-term debt by studying the commercial paper (CP) market. Using a comprehensive database of CP issuers and issuance activity, we show that firms use CP to provide start-up financing for capital investment. Firms’ CP issuance activity is driven by a desire to minimize transactions costs associated with raising capital for new investment. We show that firms with high rollover risk are less likely to enter the CP market, borrow less CP, and borrow more from bank credit lines. We find that CP is often refinanced with long-term bond issuance to reduce rollover risk.

Empirical Analysis of Corporate Credit Lines

Since bank credit lines are a major source of corporate funding and liquidity, we examine the determinants of credit line usage with a database of Spanish corporate credit lines. A line's default status is the primary factor driving its usage, which increases as a firm approaches default. Several lender characteristics suggest an important role for bank monitoring in firms' usage decisions. Credit line usage is found to be inversely related to macroeconomic conditions. Overall, while several factors influence corporate credit line usage, our analysis suggests that default and supply-side variables are the most important.

Empirical Analysis of Corporate Credit Lines

Since bank credit lines are a major source of corporate funding and liquidity, we examine the determinants of credit line usage with a database of Spanish corporate credit lines. A line's default status is the primary factor driving its usage, which increases as a firm approaches default. Several lender characteristics suggest an important role for bank monitoring in firms' usage decisions. Credit line usage is found to be inversely related to macroeconomic conditions. Overall, while several factors influence corporate credit line usage, our analysis suggests that default and supply-side variables are the most important.

Bank Lines of Credit in Corporate Finance: An Empirical Analysis

I empirically examine the factors that determine whether firms use bank lines of credit or cash in corporate liquidity management. I find that bank lines of credit, also known as revolving credit facilities, are a viable liquidity substitute only for firms that maintain high cash flow. In contrast, firms with low cash flow are less likely to obtain a line of credit, and they rely more heavily on cash in their corporate liquidity management. An important channel for this correlation is the use of cash flow-based financial covenants by banks that supply credit lines. I find that firms must maintain high cash flow to remain compliant with covenants, and banks restrict firm access to credit facilities in response to covenant violations. Using the cash-flow sensitivity of cash as a measure of financial constraints, I provide evidence that lack of access to a line of credit is a more statistically powerful measure of financial constraints than traditional measures used in the literature. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Expanding Finance-Based Scheduling to Devise Overall-Optimized Project Schedules

Construction contractors often finance projects using bank credit lines that allow contractors to withdraw money up to certain credit limits. Finance-based scheduling provides schedules that ensure that the contractor’s indebtedness at any time during the construction stage does not exceed the credit limit. Generally, constricted credit limits tend to yield prolonged schedules. Provided that credit limits can be adequately relaxed, compressed schedules of compressed-duration activities can be attained. Devising a compressed schedule calls for the incorporation of time-cost trade-off (TCT) analysis to strike a balance between the decreased overhead costs and the increased direct costs of the activities. Since employing TCT analysis usually causes great fluctuations in the daily resource requirements by mixing compressed-duration activities of high resource demand with others of low resource demand, therefore, the need for resource management techniques becomes inevitable to ensure efficient utilization of resources. This note used genetic algorithms to expand finance-based scheduling to devise schedules for relaxed credit limits. A prototype system was developed and coded using VISUAL BASIC, then demonstrated using a five-activity example project. The prototype was validated by comparing the results with those obtained by using the integer programming. Expanding finance-based scheduling to handle the whole spectrum of credit limits helps devise overall-optimized schedules that consider cash, time, cost, and resources.

Bank Lines of Credit in Corporate Finance: An Empirical Analysis

I empirically examine the factors that determine whether firms use bank lines of credit or cash in corporate liquidity management. Bank lines of credit, also known as revolving credit facilities, are a viable liquidity substitute only for firms that maintain high cash flow. Firms with low cash flow are less likely to obtain a line of credit, and rely more heavily on cash in their corporate liquidity management. An important channel for this correlation is the use of cash flow-based financial covenants by banks that supply credit lines. Firms must maintain high cash flow to remain compliant with covenants, and banks restrict firm access to credit facilities in response to covenant violations. Using the cash flow sensitivity of cash as a measure of financial constraints, I provide evidence that lack of access to a line of credit is a more statistically powerful measure of financial constraints than traditional measures used in the literature.

The Sources of Debt Matter, Too

This paper examines the effects of bank loans, loans from non-bank financial intermediaries, and unused bank credit lines on firm cash holdings, equity risk, and investment. Firms with more bank loans have more cash and investment, but lower equity risk. Firms with more non-bank private debt have lower equity risk and less investment. Firms with more unused credit lines have less cash and lower equity risk, but greater investment. Results suggest that depending on type, private debt mitigates the information asymmetry or asset substitution problem, or both. Results also imply that deposit relationships associated with commercial bank borrowing attribute to banks' information advantage.