Cash Holdings and Relationship Lending
62 Pages Posted: 28 May 2021 Last revised: 22 Sep 2021
Date Written: September 22, 2021
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
Suggested Citation: Suggested Citation