In this paper we offer the first large sample evidence on the availability and usage of
credit lines in U.S. public corporations and use it to re-examine the existing findings on
corporate liquidity. We show that the availability of credit lines is widespread and that
average undrawn credit is of the same order of magnitude as cash holdings. We test the
trade-off theory of liquidity according to which firms target an optimum level of liquidity,
computed as the sum of cash and undrawn credit lines. ...
In this paper we offer the first large sample evidence on the availability and usage of
credit lines in U.S. public corporations and use it to re-examine the existing findings on
corporate liquidity. We show that the availability of credit lines is widespread and that
average undrawn credit is of the same order of magnitude as cash holdings. We test the
trade-off theory of liquidity according to which firms target an optimum level of liquidity,
computed as the sum of cash and undrawn credit lines. We provide support for the existence
of a liquidity target, but also show that the reasons why firms hold cash and credit lines
are very different. While the precautionary motive explains well cash holdings, the optimum
level of credit lines appears to be driven by the restrictions imposed by the credit line itself,
in terms of stated purpose and covenants. In support to these findings, credit line drawdowns
are associated with capital expenditures, acquisitions, and working capital.
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