Cash policy and the bank-firm relationship |
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Institution: | 1. Graduate school of Economics, Nagoya University, Japan;2. Faculty of Finance-Banking, Ho Chi Minh City Open University, Viet Nam;3. Department of Economics, Nagoya University, Japan;1. Department of Economics, Nagoya University, Japan;2. School of Management, Swansea University, United Kingdom;1. Cardiff Business School, Cardiff, UK; Nottingham University Business School China; and School of Public Finance and Taxation, Zhongnan University of Economics & Law, China;2. School of Management, Fudan University, China |
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Abstract: | Bank health affects a firm's cash holding - a healthy bank can result in either more (because of the influential bank power) or less (because of precautionary motive) firm-level cash holding. Motivated by the contrasting views in the existing literature, this paper investigates whether bank policy determines firm-level cash policy. Using Japanese firm-level data over 2000–2014, we find that the difference in bank health effects stems from the firm's investment status. We find that healthy banks induce growing firms to hold more cash while declining firms hold more cash when borrowing from unhealthy banks. Furthermore, we find that banks with more liquidity also induce their growing borrowers to have more cash. Our results are robust to the endogeneity of bank selection. Our study indicates that bank-firm relationship can serve as an advance-signalling device for a firm's shareholder-wealth-maximizing investments and contributes to the literature that explains the cash holding puzzle. |
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Keywords: | Cash policy Bank-firm relationship Financial constraint Japanese banks Bank capital Bank liquidity G32 G21 G31 |
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