Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management
26 Pages Posted: 29 Sep 2006
Date Written: September 2000
Evidence in this paper suggests that a close banking relationshipa loan commitment in particularrelaxes 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: loan commitments, bank relationship, cash flow restraint, cash management
JEL Classification: G21, G32
Suggested Citation: Suggested Citation