Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management
FRBNY Staff Reports No. 108
26 Pages Posted: 7 Nov 2000
There are 2 versions of this paper
Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management
Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management
Date Written: January 1999
Abstract
Evidence in this paper suggests that a close banking relationship - a loan commitment in particular - relaxes cash flow and cash management constraints on firms. Given firms' prospects (Q), the investment and cash flow correlation is substantially lower when firms have a bank loan commitment. The difference in cash flow sensitivity reflects differences in firms' cash management practices in the face of cash flow shocks. Firms with a commitment simply run down their stocks of cash (or borrow more) when their cash flow falls but their investment prospects remain strong. The different investment-cash flow sensitivities and cash management practices suggest that the firms with a bank commitment relationship are less financially constrained.
Keywords: Bank commitment relationships, cash flow constraints, liquidity management
JEL Classification: G21, G32
Suggested Citation: Suggested Citation
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