Do Relationships Have Limits? Banking Relationships, Financial Constraints, and Investment

Abstract

Using detailed information on the debt structure of 250 publicly traded U.S. firms over the 1980–93 period, we find that the sensitivity of investment to internally generated funds increases with a firm’s reliance on bank financing. Bank‐dependent firms also hold larger stocks of liquid assets and have lower dividend payout rates. However, the greater cash sensitivity of investment for bank‐dependent firms arises only for the largest capital expenditures (relative to assets). For most levels of investment spending, bank‐dependent firms appear to be slightly less cash‐flow‐constrained than firms with access to public debt markets.