Do Firm-Bank Relationships Affect Corporate Cash Holdings?

Abstract

This paper explores the impact of firm-bank relationships on corporate cash holdings using a sample of more than 4,000 Ukrainian companies over the period from 2008 to 2015. The empirical evidence suggests that the duration of the relationship and the presence of multiple bank relationships affect corporate cash holdings. Specifically, an increase in the length of a bank’s relationship with a main bank initially reduces corporate cash holdings but the effect turns positive due to the hold-up problem when the relationship matures. We also observe that companies with a greater number of bank relationships tend to hold more cash reserves, whereas more competition among banks allows firms to hold less cash. Additionally, we document that firm-bank relationships are important in helping firms resolve agency conflicts and facilitate reducing a firm’s financial constraints.