Title: 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: Bank loans, Banks and banking, Customer services