Does bank relationship matter for a firm's investment and financial constraints? The case of Taiwan [An article from: Pacific-Basin Finance Journal]

This digital document is a journal article from Pacific-Basin Finance Journal, published by Elsevier in 2005. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.

Description:
This paper investigates the effects of a bank relationship on reducing a firm's financial asymmetric information in an investment function. A bank relationship is proxied by the number of banks that a firm engages for its borrowing activities. A bank relationship is further divided into two regimes, i.e., a strong and a weak bank relationship regime, where the former is defined as one with smaller number of loan related-bank, and the latter is one with a greater number. It is expected that a strong bank relationship reduces the asymmetric information, i.e., investment cash-flow sensitivity here. Based on the examination of unique Taiwanese bank transaction data, our results show that investment is less sensitive to cash flow when a firm has a strong bank relationship. This implies that the firm holds less cash flow in hand for future investment expenditures. By contrast, when a firm has a weak bank relationship, the investment is sensitive to cash-flow. Our results are robust regardless if the bank relationship is proxied by either the loan amount or loan duration.