A0902
Title: Dynamic financial constraints in presence of uncertainty: Theory and evidence from credit lines
Authors: Niklas Amberg - Sveriges Riksbank (Sweden) [presenting]
Abstract: Using a comprehensive Swedish credit registry, firms throughout the size distribution are documented to have access to substantial amounts of unused borrowing capacity via credit lines. This finding seems to conflict with the notion that financial constraints are widespread in the economy, but we show that uncertainty can help reconcile the apparent contradiction. We begin by constructing a model in which firms optimally choose not to borrow up to the limit when facing uncertainty about future productivity and access to external financing; this choice results from a trade-off between the benefits of borrowing today and the expected cost of illiquidity tomorrow. We then empirically test and confirm the main predictions of the model, in particular, that credit-line utilisation rates are negatively related to idiosyncratic uncertainty. Our findings imply that financial constraints need to be assessed dynamically, since a firm can be financially constrained even when its borrowing constraint is not binding in a static sense.
