Job Market Paper:
The Undrawn Credit Line Premium
This paper studies the cross-sectional relationship between corporate undrawn credit line holdings and expected returns. I document that firms with more undrawn credit lines earn 3.88~5.74% higher returns than firms with less undrawn credit lines. To rationalize this finding, I incorporate the major features of credit line contracts into the investment-based asset pricing framework to illustrate a novel risk-based mechanism: firms with larger idiosyncratic liquidity needs endogenously hold more undrawn credit lines to preserve flexible and cheap liquidity. However, due to credit line revocations that strongly correlate with aggregate economic conditions, they become more exposed to aggregate shocks, yielding the positive undrawn credit line premium.
Macro-finance, Empirical and Theoretical Asset Pricing, and Macroeconomics