Bank lines of credit during macroeconomic contraction: An empirical analysis of credit line usage and availability

Søren Thirstrup Larsen

Student thesis: Master thesis

Abstract

This thesis set out to investigate the usage and availability of bank lines of credit in corporate liquidity management for large public firms during macroeconomic contraction. Corporate liquidity management and especially bank lines of credit are receiving increasing attention, both in the literature and in the marketplace. To investigate this, I employ a random sample of 95 public US non-bank firms, which is analyzed in the 2007-2011 timeframe that entails the recent financial crisis and the negative effects on the general economic context this brought about. In recent theory, bank lines of credit are believed to be held primarily for liquidity reason and for future capital to engage in investments, but also questioned for their non-contingent characteristics. By applying a combination of Compustat data coupled with analysis of annual financial reports, I set up a series of 16 variables from which the data is correspondingly tested. This approach was pioneered by Sufi (Sufi, 2005 & 2009). My findings indicate that bank lines of credit during stressed scenarios are not used extensively to support either of the two variables liquidity and capital to engage in investments, as otherwise suggested by theory. Credit lines are found to be held in abundance to their need, but that this might be due to firm specific factors affecting the credit deciding decision. In terms of availability during macroeconomic contraction, credit lines are found to be reduced for 20 % of the firms in the sample, with 10 % experiencing a reduction material enough to affect operations. Holding relative to the total number of firm-years analyzed in the sample however, material reductions are only found to be taking place in 2.1 % of the observations.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2013
Number of pages87