Corporate Liquidity and the Contingent Nature of Bank Credit Lines: Evidence on the Costs and Consequences of Bank Default

60 Pages Posted: 25 Feb 2014 Last revised: 26 Aug 2016

See all articles by Anthony D. May

Anthony D. May

Wichita State University - W. Frank Barton School of Business

Date Written: 2014

Abstract

I study the impact of Lehman Brothers’ bankruptcy and resultant inability to honor its obligations as a lender under committed credit lines. Firms that lost access to a credit line committed by Lehman Brothers experienced abnormal stock returns of -3%, on average, on the day of and day after Lehman’s bankruptcy filing, amounting to roughly $5.7 billion in aggregate, risk-adjusted losses. These losses were significantly larger for firms that were more financially constrained, firms with less cash, firms for whom Lehman was a lead-bank, and firms that lost access to larger amounts of committed credit. During the four quarters immediately following Lehman’s collapse, firms that lost access to a credit line cut their investment spending significantly while simultaneously hoarding more cash than comparable firms. Overall, these findings indicate that firms that lost access to a credit line incurred economically significant costs and real-side consequences as a result of Lehman’s default on its loan commitments.

Keywords: credit line; corporate liquidity; loan commitment; Lehman Brothers; financial crisis; financial constraints

JEL Classification: G24, G21, G31, G32, G14

Suggested Citation

May, Anthony D., Corporate Liquidity and the Contingent Nature of Bank Credit Lines: Evidence on the Costs and Consequences of Bank Default (2014). Journal of Corporate Finance, Vol. 29, December 2014, Pages 410-429 , Available at SSRN: https://ssrn.com/abstract=2400635 or http://dx.doi.org/10.2139/ssrn.2400635

Anthony D. May (Contact Author)

Wichita State University - W. Frank Barton School of Business ( email )

1845 N. Fairmount
Wichita, KS 67260
United States

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