Federal Deposit InsuranceCorporation• Center for Financial Researchh
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-01
Bank Lines of Credit in Corporate Finance: An Empirical Analysis
Söhnke M. Bartram
Gregory W. Brown
John E. Hund
July 2005
Sanjiv R. Das
Darrell Duffie
Nikunj Kapadia
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
Risk-Based Capital Standards,
Deposit Insurance and Procyclicality
FDIC Center for Financial Research
Working Paper
No. 2006-01
Bank Lines of Credit in Corporate Finance: An Empirical Analysis
Söhnke M. Bartram
Gregory W. Brown
John E. Hund
July 2005
Bank Lines of Credit in Corporate Finance:
An Empirical Analysis
AMIR SUFI*
University of Chicago
Graduate School of Business
June 2006
Abstract
I empirically examine the factors that determine whether firms use bank lines of credit or cash in
corporate liquidity management. Bank lines of credit, also known as revolving credit facilities, are a
viable liquidity substitute only for firms that maintain high cash flow. Firms with low cash flow are less
likely to obtain a line of credit, and rely more heavily on cash in their corporate liquidity management.
An important channel for this correlation is the use of cash flow-based financial covenants by banks that
supply credit lines. Firms must maintain high cash flow to remain compliant with covenants, and banks
restrict firm access to credit facilities in response to covenant violations. Using the cash flow sensitivity
of cash as a measure of financial constraints, I provide evidence that lack of access to a line of credit is a
more statistically powerful measure of financial constraints than traditional measures used in the
literature.
*5807 South Woodlawn Avenue, Chicago, IL 60637; email: amir.sufi@chicagogsb.edu; phone: 773 702 6148; fax:
773 702 0458. I thank Heitor Almeida, Murillo Campello, Douglas Diamond, Michael Faulkender, Mark Flannery,
Christopher James, Anil Kashyap, Aziz Lookman, David Matsa, Francisco Perez-Gonzalez, Mitchell Petersen,
James Poterba, Joshua Rauh, Antoinette Schoar, Jeremy Stein, Philip Strahan, and Peter Tufano for helpful
comments and discussions. I also thank Ali Bajwa and James Wang for helping with computer programs that made
this paper possible. This work benefited greatly from seminar participants at the Federal Reserve Bank of New
York (Banking Studies), the University of Rochester (Simon), the University of Florida (Warrington), the FDIC
Center for Financial Research Workshop, Washington University (Olin), the NBER Corporate Finance meeting, and
the Western Finance Association annual meeting. I gratefully acknowledge financial support from the FDIC’s
Center for Financial Research.
An Empirical Analysis
AMIR SUFI*
University of Chicago
Graduate School of Business
June 2006
Abstract
I empirically examine the factors that determine whether firms use bank lines of credit or cash in
corporate liquidity management. Bank lines of credit, also known as revolving credit facilities, are a
viable liquidity substitute only for firms that maintain high cash flow. Firms with low cash flow are less
likely to obtain a line of credit, and rely more heavily on cash in their corporate liquidity management.
An important channel for this correlation is the use of cash flow-based financial covenants by banks that
supply credit lines. Firms must maintain high cash flow to remain compliant with covenants, and banks
restrict firm access to credit facilities in response to covenant violations. Using the cash flow sensitivity
of cash as a measure of financial constraints, I provide evidence that lack of access to a line of credit is a
more statistically powerful measure of financial constraints than traditional measures used in the
literature.
*5807 South Woodlawn Avenue, Chicago, IL 60637; email: amir.sufi@chicagogsb.edu; phone: 773 702 6148; fax:
773 702 0458. I thank Heitor Almeida, Murillo Campello, Douglas Diamond, Michael Faulkender, Mark Flannery,
Christopher James, Anil Kashyap, Aziz Lookman, David Matsa, Francisco Perez-Gonzalez, Mitchell Petersen,
James Poterba, Joshua Rauh, Antoinette Schoar, Jeremy Stein, Philip Strahan, and Peter Tufano for helpful
comments and discussions. I also thank Ali Bajwa and James Wang for helping with computer programs that made
this paper possible. This work benefited greatly from seminar participants at the Federal Reserve Bank of New
York (Banking Studies), the University of Rochester (Simon), the University of Florida (Warrington), the FDIC
Center for Financial Research Workshop, Washington University (Olin), the NBER Corporate Finance meeting, and
the Western Finance Association annual meeting. I gratefully acknowledge financial support from the FDIC’s
Center for Financial Research.