Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management

26 Pages Posted: 29 Sep 2006

Multiple version iconThere are 2 versions of this paper

Date Written: September 2000

Abstract

Evidence in this paper suggests that a close banking relationship—a loan commitment in particular—relaxes 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

Morgan, Donald P., Bank Commitment Relationships, Cash Flow Constraints, and Liquidity Management (September 2000). Federal Reserve Bank of New York Research Paper Series - Staff Report, No. 108. Available at SSRN: https://ssrn.com/abstract=933367 or http://dx.doi.org/10.2139/ssrn.933367

Donald P. Morgan (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
Research Department
New York, NY 10045
United States
212-720-6573 (Phone)

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