Do Firms Draw Down Credit Lines to Support Investment Opportunities?

I show that firms use credit lines to fund investment opportunities that are created by R&D success. Using patent filings as a proxy for R&D success, I find an increase in capital expenditures following R&D success, supporting the proposition that R&D success creates investment opportunities. In addition, credit-line drawdowns increase following patent filings. Consistent with the proposition that firms draw down credit lines to fund investment opportunities created by R&D success, credit-line drawdowns following patent filings are more pronounced in firms that operate in industries characterized by heavy external financing dependence and high levels of capital expenditures. Furthermore, patent filings do not coincide with increases in other expenditures that are known to be funded with credit lines. The results cannot be explained by credit-supply effects or time-varying state-level omitted variables. Lastly, there is no significant association between capital expenditures and credit-line drawdowns; only capital expenditures that are instrumented with patent filings are associated with credit-line drawdowns. These results support Lins, Servaes, and Tufano's (2010) survey findings that firms use credit lines to fund future investment opportunities that are available in good times