Bank liquidity supply, corporate liquidity management, and investment: evidence from the 1998 Russian crisis.

This article studies the effect of bank liquidity supply on the corporate liquidity management choice between cash and lines of credit and the real effects of liquidity. By exploiting an exogenous shock to U.S. banks induced by the 1998 Russian crisis, I find that the liquidity shock has a significantly negative impact on U.S. firms' reliance on credit lines relative to cash. Firms who initiate their last precrisis credit lines from banks exposed to the crisis (treated firms) have a lower likelihood of obtaining new credit lines during the crisis relative to the precrisis clients of nonexposed banks (control firms). Moreover, firms hoard cash and cut investment after the shock, but the effects are concentrated among firms whose precrisis credit lines are maturing in the crisis. These results suggest that a shortage of credit lines forces firms to substitute cash savings for investment, indicating an important role of precautionary savings motives in transmitting liquidity shocks. [ABSTRACT FROM AUTHOR]