Credit Lines and the Substitutability of Cash and Debt

Abstract

We analyze credit line characteristics and changes in cash for a panel of firms over 1996-2006, and find evidence consistent with the economic importance of transactions costs for the management of liquidity and the resulting effects on shareholder value. We find that shareholders of financially-unconstrained firms value credit line availability and cash holdings similarly. Financially-constrained firms can increase firm value by increasing cash and credit line debt by the same amount, consistent with the theory of Gamba and Triantis (2007). The results provide strong evidence that transactions costs shape financial policy, and that shareholders benefit from low-fixed-cost access to liquidity.