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Cash Holdings and Relationship Lending

Oct 16, 2020 11:00 am - 12:30 pm AEDT


We examine the effect of relationship lending on a firm’s cash-holding levels. Relationship lending allows a lender to generate private information about its borrowers at a lower cost compared to an arm’s-length lender. This advantage of relationship lending can mitigate financial constraints of the borrower. We find that the level of cash holding for firms with a relationship lender is significantly lower compared to firms that borrow from non-relationship lenders. We show that access to a relationship lender is associated with significantly lower levels of cash holding for firms which operate in industries that have high cash flow volatility. Our finding is consistent with borrowing relationships reducing the cash holding need for precautionary purposes. Finally, we show that relationship lending is not associated with the market value of firms’ cash holdings. Our results provide empirical evidence that relationship lending is related to the composition of short-term assets chosen by firms.