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Do Relationships Have Limits? Banking Relationships, Financial Constraints, and Investment

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  • Houston, Joel F
  • James, Christopher M

Abstract

Using detailed information on the debt structure of 250 publicly traded U.S. firms over the 1980-93 period, we find that the sensitivity of investment to internally generated funds increases with a firm's reliance on bank financing. Bank-dependent firms also hold larger stocks of liquid assets and have lower dividend payout rates. However, the greater cash sensitivity of investment for bank-dependent firms arises only for the largest capital expenditures (relative to assets). For most levels of investment spending, bank-dependent firms appear to be slightly less cash-flow-constrained than firms with access to public debt markets. Copyright 2001 by University of Chicago Press.

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  • Houston, Joel F & James, Christopher M, 2001. "Do Relationships Have Limits? Banking Relationships, Financial Constraints, and Investment," The Journal of Business, University of Chicago Press, vol. 74(3), pages 347-374, July.
  • Handle: RePEc:ucp:jnlbus:v:74:y:2001:i:3:p:347-74
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