CORPORATE CASH HOLDINGS AND CREDIT LINE USAGE

Abstract

We investigate the factors driving the unprecedented rise in corporate liquidities since the 1970s. We find that an economy‐wide reduction in the cost of holding liquidities and an increase in risk best explain the rise in cash holdings and the widespread use of credit lines. The structural estimation results shed light on two widely acknowledged motives for holding cash. The precautionary motive and the liquidity motive translate risk exposure into cash holdings. Our results, however, do not suggest that firms have become more prudent over time. It is higher liquidity needs that has forced firms to hold more cash and use more credit lines.