Wenxuan Zheng
ABSTRACT
In this article, we will discuss whether lines of credit can be a supplement to cash as a source of liquidity for firms to make a choice. When firms want to raise funds from market, a credit line or cash will be both agreeable choice, if the world is frictionless, where there exist no transaction cost, and where information is symmetry. However, the world is frictional, and these two are distinctive to each others under special circumstances, be them covenants in a contract, unexpected market downturn, and even unique properties of cash and credit lines. Also reactions from firms when face cash and credit lines render their difference more probable and observable. Furthermore, a shift of preference to credit lines during and after credit crisis for bank and firms will be noticed. When credit crisis in 2008 broke out, banks and firms would re-consider their liquidity management in order to hedge off their financial risk as much as possible.
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Index Terms
- Bank Lines of Credit Will Be the Supplement to Cash in Corporate Liqudity Management
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