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Liquidity, Firm Value and Long-Term Bank Relationships

University of Padova Economics Working Paper No. 20-2000

36 Pages Posted: 17 May 2001  

Michele Moretto

University of Padua - Department of Economics; Fondazione Eni Enrico Mattei (FEEM)

Roberto Tamborini

University of Trento - Department of Economics and Management

Date Written: October 3, 2000

Abstract

Our interest here concerns liquidity supply as a distinctive feature of the bank-firm relationship. Any agent facing an opportunity or a commitment may find him/herself unexpectedly illiquid, and hence he/she may find it profitable to borrow "on call" if this costs less than missing the opportunity or defaulting on the commitment, or it costs less than using non-money assets as means of payment. We first examine the relation between firm value and access to liquidity supply, and then we investigate the efficiency properties of bank refinancing contracts in a continuous time stochastic model of a repeated firm-bank relationship, where the key problem is the credibility of the mutual commitment between the two parties. Our main finding is that cost-minimizing and renegotiation-proof contracts emerge in the absence of perfect commitment and enforceability of payments as the borrower and the bank can exert mutual threat of termination.

Keywords: Liquidity, firm value, bank relationships

JEL Classification: C73, G21, G33

Suggested Citation

Moretto, Michele and Tamborini, Roberto, Liquidity, Firm Value and Long-Term Bank Relationships (October 3, 2000). University of Padova Economics Working Paper No. 20-2000. Available at SSRN: https://ssrn.com/abstract=268638 or http://dx.doi.org/10.2139/ssrn.268638

Michele Moretto

University of Padua - Department of Economics ( email )

via Del Santo 33
Padova, 35123
Italy
+39 049 8274265 (Phone)
+39 049 8274211 (Fax)

Fondazione Eni Enrico Mattei (FEEM) ( email )

Corso Magenta 63
20123 Milan
Italy

Roberto Tamborini (Contact Author)

University of Trento - Department of Economics and Management ( email )

Via Inama 5
Trento, I-38100
Italy

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