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Bank Lines of Credit as a Source of Long-Term Finance

Published online by Cambridge University Press:  09 December 2022

Xin Chang Open the ORCID record for Xin Chang [Opens in a new window] ,
Yunling Chen Open the ORCID record for Yunling Chen [Opens in a new window]  and
Ronald W. Masulis Open the ORCID record for Ronald W. Masulis [Opens in a new window]
Xin Chang
Affiliation:
Nanyang Technological University Nanyang Business School changxin@ntu.edu.sg
Yunling Chen
Affiliation:
Tsinghua University School of Economics and Management chenyl2@sem.tsinghua.edu.cn
Ronald W. Masulis*
Affiliation:
University of New South Wales Sydney, School of Business, ECGI, and ABFER
*
ron.masulis@unsw.edu.au (corresponding author)
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Abstract

Hand-collecting credit line drawdowns that firms classify as long-term debt, we first document how long-term drawdowns rise with high investment needs or weak external capital market conditions. Nearly all drawdown proceeds finance long-term investment, including M&A activity. Unrated and lower-rated firms rely more on long-term drawdowns than high or very poorly rated firms. We further find that credit lines have tighter covenants than terms loans. Drawdowns are repaid fairly quickly and often refinanced with other long-term debt. Our findings support the monitored liquidity insurance theory of credit lines and highlight that long-term drawdowns act as a valuable bridge financing mechanism.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 4 , June 2023 , pp. 1701 - 1733
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

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Footnotes

We are grateful to Murillo Campello (the referee) and Paul Malatesta (the editor), whose comments and guidance substantially improved this article. We thank Suman Banerjee, Robert Brooks, Doug Foster, Huasheng Gao, Gilles Hilary, Jun-Koo Kang, Andy Kim, Clive Lennox, Laura Liu, Raymond Liu, Wei-Lin Liu, Angie Low, Peter MacKay, Ouarda Merrouche, Lilian Ng, Phong Ngo, Tomoki Oshika, Rik Sen, Amir Sufi, Lei Zhang, seminar participants at Australian National University, HKUST, Nanyang Technological University, Tsinghua University, University of Melbourne, University of New South Wales, University of Queensland, Waseda University, and the U.S. Federal Reserve Bank of Atlanta, and conference participants at the Sydney University 2017 Banking and Financial Stability Conference for helpful comments, discussions, and suggestions. We particularly thank Sudipto Dasgupta for his invaluable contributions to the earlier drafts of the article. We also thank Amir Sufi for making the lines of credit and covenant violation data available on his website and Tai-Yuan Chen for sharing with us his credit line data. We acknowledge financial support from the Ministry of Education (Singapore) (RT01/19), the Ministry of Education (China) (18YJAZH004), the National Science Foundation of China (72072067 and 72132010), the 111 Project (B20094), and Beijing Outstanding Young Scientist Program (BJJWZYJH01201910034034). All errors are our own.

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