Why did Firms Draw Down their Credit Lines during the COVID-19 Shutdown?

The economic shutdown associated with the COVID-19 pandemic witnessed a surge in drawdowns on pre-existing credit lines. This paper examines how this liquidity was used by firms. Drawdowns were associated with an immediate accumulation of liquid assets followed by a depletion of this liquidity as the U.S. economy stabilized after the spring of 2020. Drawdowns were generally not associated with greater levels of physical investment or employment either immediately after the drawdowns or several months later. Rather, the depletion of liquidity is simultaneous with an increase in the equity to assets ratio, consistent with repayments of the drawdowns. These facts are consistent with the idea that firms drew down their credit lines due to a precautionary motive to mitigate future liquidity risk until the economy started to stabilize. However, we find evidence that firms in industries that were less affected by the shutdown, such as professional services that can be performed remotely, were relatively more likely to use drawdowns to maintain investment rather than accumulate liquidity. On the intensive margin, this is especially true for firms in such industries that drew a relatively small amount of funds.