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In Rememberance: World Trade Center (WTC)

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Bank Lines of Credit in Corporate Finance: An Empirical Analysis

by Amir Sufi of the University of Chicago

October 24, 2005

Abstract: I use novel data collected from annual 10-K SEC filings to conduct the first large sample empirical examination of the use of bank lines of credit by public corporations. I find that the supply of lines of credit by banks to corporate borrowers is particularly sensitive to the borrower's historical profitability. Even among borrowers that have access to a bank line of credit, banks employ strict covenants on profitability, and the borrower loses access to the unused portion of the line of credit when it experiences a drop in profitability. The findings identify a specific constraint (the inability to obtain a line of credit) that causes low profitability firms to hold larger cash balances in their liquidity management strategies.

Keywords: loan commitments, revolving credit facilities, lines of credit, covenants, default.

Published in: Review of Financial Studies, Vol. 22, No. 3, (March 2009), pp. 1057-1088.

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