Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management

FRBNY Staff Reports No. 108

26 Pages Posted: 7 Nov 2000

Multiple version iconThere are 2 versions of this paper

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

Morgan, Donald P., Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management (January 1999). FRBNY Staff Reports No. 108, Available at SSRN: https://ssrn.com/abstract=246671 or http://dx.doi.org/10.2139/ssrn.246671

Donald P. Morgan (Contact Author)

Federal Reserve Bank of New York ( email )

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