Relationship Lending and Financing Constraints: Firm-Level Evidence for India
Using a panel dataset of over 800 listed manufacturing firms for 1995-2005, the paper examines whether bank-firm relationships influence a firm’s financing constraints. The results indicate that a firm with fewer related banks maintains less cash and its equivalents even in the presence of potential investment opportunities. This suggests that establishing a close loan relationship with few banks could reduce the cost of private loans, enabling the firm to maintain lower liquidity levels. The analysis concludes with several robustness checks of the baseline results.
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