Article ID: | iaor201523432 |
Volume: | 37 |
Issue: | 2 |
Start Page Number: | 243 |
End Page Number: | 265 |
Publication Date: | Jun 2014 |
Journal: | Journal of Financial Research |
Authors: | Kizilaslan Atay, Manakyan Mathers Ani |
Keywords: | finance & banking, management, economics |
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.