1. Weathering Cash Flow Shocks
- Author
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Ivan Ivanov, James R. Brown, and Matthew Gustafson
- Subjects
Economics and Econometrics ,media_common.quotation_subject ,Monetary economics ,Cash flow forecasting ,Bank credit ,Accounting ,0502 economics and business ,Economics ,Price/cash flow ratio ,Cash management ,media_common ,Finance ,040101 forestry ,050208 finance ,business.industry ,05 social sciences ,04 agricultural and veterinary sciences ,Cash conversion cycle ,Interest rate ,Market liquidity ,Shock (economics) ,Operating cash flow ,Loan ,0401 agriculture, forestry, and fisheries ,Cash flow ,Volatility (finance) ,business ,Winter weather - Abstract
Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank-borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower-friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the non-fundamental component of cash flow volatility, especially for solvent small bank borrowers.
- Published
- 2021
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