Abstract
Abstract Is it possible for firms facing competitive credit markets to form strong ties to particular creditors? Does the benefit to a firm of forming such relationships diminish when credit markets get more competitive? There is a theoretical reason for believing that credit market competition may be inimical to the formation of mutually beneficial relationships between firms and specific creditors. When a firm is young or distressed, the potential for future cash flows from its projects may be high, while the actual cash it generates is low. When evaluating the creditworthiness of the firm, a creditor should take into account the stream of future profits the firm may generate.
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