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

59 Pages Posted: 4 Oct 2015 Last revised: 6 Dec 2022

See all articles by Xin Chang

Xin Chang

Nanyang Business School, Nanyang Technological University

Yunling Chen

University of Shanghai for Science and Technology - Business School; Tsinghua University - School of Economics and Management

Ronald W. Masulis

University of New South Wales, Sydney; European Corporate Governance Institute (ECGI); Financial Research Network (FIRN); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Date Written: January 5, 2022

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.

Keywords: Lines of Credit, Long-term Credit Line Drawdowns, Corporate Liquidity Management, Long-term Financing, Bridge Loans

JEL Classification: G21, G31, G32

Suggested Citation

Chang, Xin and Chen, Yunling and Masulis, Ronald W., Bank Lines of Credit as a Source of Long-term Finance (January 5, 2022). Nanyang Business School Research Paper No. 22-02, Available at SSRN: https://ssrn.com/abstract=2669076 or http://dx.doi.org/10.2139/ssrn.2669076

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

Singapore, 639798
Singapore

HOME PAGE: https://personal.ntu.edu.sg/changxin/

Yunling Chen

University of Shanghai for Science and Technology - Business School ( email )

Shanghai
China

Tsinghua University - School of Economics and Management ( email )

Tsinghua University
Beijing, 100084
China
86-10-62798631 (Phone)

Ronald W. Masulis (Contact Author)

University of New South Wales, Sydney ( email )

UNSW Business School
High St
Sydney, NSW 2052
Australia
612-9385-5860 (Phone)
612-9385-6347 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

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