Report

Bank commitment relationships, cash flow constraints, and liquidity management

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: Cash flow; Cash management; Bank liquidity;

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2000

Number: 108