The Response of Firms' Investment and Financing to Adverse Cash Flow Shocks: The Role of Bank Relationships

National Bank of Belgium Working Paper No. 87

35 Pages Posted: 10 Oct 2010

See all articles by Catherine Fuss

Catherine Fuss

National Bank of Belgium

Philip Vermeulen

European Central Bank (ECB)

Date Written: July 13, 2006

Abstract

We test whether firms with a single bank are better shielded from loss of credit and investment cuts in periods of adverse cash flow shocks than firms with multiple bank relationships. Our estimates of the cash flow sensitivity of investment show that both types of firms are equally subject to financing constraints that bind only in the event of adverse cash flow shocks. In these periods, firms incur lower cuts in investment expenditures when they can obtain extra credit. In periods of adverse cash flow shocks, the probability of obtaining extra bank debt becomes more sensitive to the size and leverage of the firm.

Keywords: financial constraints, lending relationships, firm investment, firm financing

JEL Classification: D92

Suggested Citation

Fuss, Catherine and Vermeulen, Philip, The Response of Firms' Investment and Financing to Adverse Cash Flow Shocks: The Role of Bank Relationships (July 13, 2006). National Bank of Belgium Working Paper No. 87. Available at SSRN: https://ssrn.com/abstract=1689520 or http://dx.doi.org/10.2139/ssrn.1689520

Catherine Fuss (Contact Author)

National Bank of Belgium ( email )

Brussels, B-1000
Belgium

Philip Vermeulen

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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