IFin Seminar, Victoria Vanasco - CREI "A New Theory of Credit Lines (with Evidence)"

Speaker IFin Seminar, Victoria Vanasco - CREI

Title:       "A New Theory of Credit Lines (with Evidence)"

Date:       February 20,, 2025

Ore:        12:25 - 13:40

Room:     Red Room - Executive Center

Lugano West Campus

Abstract

We develop a model that suggests a heretofore unexplored role of credit lines: To mitigate debt dilution. The results give a new perspective on the literature on leverage ratchet effects, suggesting they can be curbed by (latent) credit lines. The model explains numerous facts, including why credit lines are pervasive but rarely drawn down and why they are bundled with loans, especially for riskier borrowers. We find that the risk of credit line revocation increases borrower leverage and riskiness, suggesting that limited bank commitment can contribute to corporate distress. We find empirical support for this prediction