Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default

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Authors
May, Anthony D.
Issue Date
2014-12
Type
Article
Language
en_US
Keywords
Credit line , Corporate liquidity , Loan commitment
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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.

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Citation
May, Anthony D. 2014. Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default. Journal of Corporate Finance, vol. 29:pp 410–429
Publisher
Elsevier B.V.
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0929-1199
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