title: The determinants and the real effect of credit line: evidence from Europe
Creators: name: Mei, Shengfeng
Publisher: name: University of Glasgow
Year: 2024

description: This PhD thesis comprises four chapters that collectively investigate firms’ credit line utilisation and liquidity risk management in the context of the COVID-19 shock. Each chapter addresses distinct aspects of this topic, providing valuable insights into the behaviour of European firms and the implications for firm value generation.

Chapter 1 starts with an overview of what credit line is and what we know about it from the COVID-19 shock in the European context.

Chapter 2 focuses on firms’ liquidity risk management during the unprecedented COVID-19 shock. While existing literature extensively covers credit line usage in normal circumstances, this study explores firms’ responses to an exogenous shock unrelated to their fundamentals. By building upon previous research on weather shocks, the chapter demonstrates that the COVID-19 shock led to panic borrowing by financially unconstrained European firms. Drawing down credit lines became a means to mitigate the sharp decline in expected cash flow. The analysis reveals significant heterogeneity in borrowing behaviour across countries and industries, highlighting the importance of f irm exposure to the shock. Moreover, the chapter highlights the policy implications of banks supplying credit insurance during periods of heightened aggregate risk.

Chapter 3 investigates the purposes of credit line utilisation by European firms during the COVID-19 shock. With a focus on the European market, the chapter fills the gap in the literature by examining the factors that drive firms to access credit lines. The empirical analysis reveals that low-quality and non-investment-grade firms were more likely to draw down credit lines to mitigate cash flow shortfalls caused by the pandemic. Additionally, the study investigates whether firms used credit lines for precautionary savings or funding investment. The findings indicate that credit line drawdowns were driven by firms’ precautionary motives rather than investment funding. The chapter also explores the sensitivity of credit lines to firm size, demonstrating that mediumsized firms were more affected by cash flow shortfalls and drew down credit lines to a greater extent. Moreover, the unique nature of the COVID-19 crisis is established by comparing it with the European Crisis, where little evidence supports the precautionary purpose.

In Chapter 4, the thesis presents a comprehensive model that examines the optimal capital structure, investment decisions, and implications of credit line utilisation for wealth generation. The model highlights the significance of balancing the benefits and costs of credit line usage. It considers factors such as borrowing costs, cash holdings, line commitments, and covenant restrictions in shaping firms’ liquidity management strategies. Through a combination of theoretical analysis and empirical estimation using firm-level data, the chapter provides insights into the association between risky assets, productivity, and revolving credit facility utilisation. The findings demonstrate that credit lines play a crucial role in enhancing firm value through aggressive investment and flexible liquidity management. However, the excessive use of credit lines can lead to diminished firm worth. The analysis further shows the negative impact of the COVID-19 pandemic on corporate productivity and explores the effects of labour factors during the pandemic-induced lockdown.

In conclusion, this PhD thesis contributes to the understanding of firms’ credit line utilisation and liquidity risk management, particularly in the context of the COVID19 shock. The chapters shed light on the behaviour of European firms, the factors driving their demand for credit lines, and the implications for firm value generation. The findings have important policy implications, emphasising the role of banks in supplying credit insurance during periods of heightened aggregate risk. Overall, this thesis enhances our knowledge of firms’ responses to shocks and their strategies for managing liquidity risk, providing valuable insights for both academia and practitioners in the field of finance.