Cash Holdings and Relationship Lending

Abstract

We examine the effect of relationship lending on a firm's cash-holding levels. Relationship lending allows lenders to generate private information about borrowers which mitigates their financial constraints. We find that cash-holding levels for firms with a relationship lender are significantly lower compared to non-relationship borrowers. Within the group of firms with established lending relationships, it is the firms with high precautionary cash needs that benefit from these relationships. Such firms hold significantly less cash compared to relationship borrowers with low precautionary cash needs. We report that relationship lending is not associated with the market value of firms' cash holdings.

Keywords: Cash holdings, Relationship Lending, Financial Constraints, Capital Structure

JEL Classification: G30, G31, G32