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Bank commitment relationships, cash flow constraints, and liquidity management

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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.

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  • Donald P. Morgan, 2000. "Bank commitment relationships, cash flow constraints, and liquidity management," Staff Reports 108, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:108
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    Cited by:

    1. Mr. Yungsan Kim & Woon Gyu Choi, 2001. "Has Inventory Investment Been Liquidity-Constrained? Evidence From U.S. Panel Data," IMF Working Papers 2001/122, International Monetary Fund.

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    Keywords

    Cash flow; Cash management; Bank liquidity;
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