Uncertainty, especially financial, explains low credit line use by firms
A comprehensive Swedish credit register reveals that firms often do not fully utilize available credit lines, even with low interest rates. A new theoretical model and empirical estimation show that financial uncertainty, more than real uncertainty, explains this low utilization.
Firms hold back on credit due to future uncertainty
The study utilizes a comprehensive Swedish credit register to document that firms across all sizes have access to substantial credit lines but choose not to fully utilize them, even when interest rates are low compared to their return on equity.
This observation challenges a static view of credit constraints, which would suggest unconstrained firms.
Instead, the paper introduces a dynamic model where current financial decisions affect future financial conditions, leading to a dynamic concept of credit constraints.
The model predicts that dynamically constrained firms reduce borrowing in response to increased uncertainty about future credit access and that borrowing responds to credit limit changes even if the current constraint is slack.
These predictions are empirically confirmed, supporting the view that firms face dynamic credit constraints.
Financial shocks outweigh productivity risks
Empirical tests confirm the model's predictions.
Higher productivity uncertainty, measured by cash-flow volatility, is associated with a 4.2 percent lower average credit-line utilization rate.
Financial uncertainty, proxied by credit line maturity, shows an even more substantial effect: firms with long maturity have utilization rates 10.4 percentage points higher than those with short maturity.
Structural estimation reveals financial uncertainty, driven by liquidity shocks, is significantly more important than real uncertainty from cash flow shocks in explaining low credit utilization.
This highlights the critical role of future credit access in firms' current borrowing decisions.
Unlocking hidden credit dynamics
This study provides crucial insights by moving beyond static interpretations of credit constraints, revealing that firms' seemingly unconstrained behavior often masks deeper dynamic considerations.
The finding that financial uncertainty is a primary driver of low credit utilization has significant implications for policymakers assessing the effectiveness of credit supply measures.
It suggests that simply increasing available credit may not stimulate borrowing if underlying uncertainties about future liquidity persist.