Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default |
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| Institution: | 1. Department of Finance and International Business, Fox School of Business, Temple University, Philadelphia, PA 19122, USA;2. School of Management, Tokyo University of Science, Simokiyoku 500, Kuki-shi, Saitama-ken 346-8512, Japan;3. ACAP Advisory Public Company Limited, 195 Empire Tower, 2-3, 22nd Fl., South Sathorn Road, Yannawa, Sathorn, Bangkok 10120, Thailand;1. Finance and Economics Division, Columbia Business School, Columbia University, New York, NY 10027, United States;2. Division of Banking and Finance, Nanyang Business School, Nanyang Technological University, Singapore;3. Department of Finance and Economics, Rutgers Business School, Rutgers University, Piscataway, NJ 08854-8054, United States;4. Korea University Business School, 145 Anam-ro, Seongbuk-gu, Seoul 136-701, Republic of Korea;1. College of Business, Florida State University, Tallahassee, FL, USA;2. Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands;3. University of Groningen, Groningen, The Netherlands |
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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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