In March 2020, banks faced the largest increase in liquidity demands ever observed. Firms drew funds on a massive scale from preexisting credit lines in anticipation of cash flow and financial disruptions stemming from the advent of the COVID-19 crisis. The increase in liquidity demands was concentrated at the largest banks, who serve the largest firms. Precrisis financial condition did not constrain large banks’ liquidity supply. Coincident inflows of funds from both the Federal Reserve’s liquidity injection programs and depositors, along with strong preshock bank capital, explain why banks were able to accommodate these liquidity demands. (JEL G21, G28) Received June 7, 2020; editorial decision June 23, 2020 by Editor Isil Erel.

Competitive threats motivate firms to use convertible debt because the possibility of future conversion enhances financial flexibility. Consistent with this intuition, we find that the intensity of competitive threats is positively associated with convertible debt financing at both the extensive and intensive margins. By using large tariff reductions as exogenous shocks to competition we show that this relation is likely causal. Convertible debt usage in response to competitive threats strongly depends on a firm’s relative financial and competitive conditions. In addition, firms increase the probability of future conversion by tailoring convertible debt features.