Bank commitment relationships, cash flow constraints, and liquidity management

Description

"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"--Federal Reserve Bank of New York web site.

Subjects

Series Statement

• Staff reports ;
• no. 108
• Staff reports (Federal Reserve Bank of New York : Online) ;

Links

• http://www.ny.frb.org/research/staff_reports/sr108.html
• URL