Monetary Policy Shock, the Strength of Bank Relationship and Corporate Cash Policy

  •  Fu-Yan Luo    


This paper investigates whether strength of the bank-firm relationship affects the level of cash holding, especially in the tighter period of monetary policy. We measure the strength of bank-firm relationship by holding bank ownership, bank-firm proximity (holding local bank ownership) and the number of holding local bank ownership. We argue that remote location between firm and bank increases the cost of financial external fund, if the headquarters of firms and holding ownership bank are the same province, it is easier for companies to obtain external funding. So the strength of the local bank-firm relationship can ease financial constraint. As expected, stronger evidence supports that firms with stronger bank-firm relationship tend to hold less cash. The firms without stronger bank-firm relationship adjust their level of cash holding more quickly toward target level than holding local bank ownership firms and stronger bank relationship reduces the investment-cash sensitivity. Our findings are in line with our expectations and support both the precautionary motive for holding cash and the pecking order theory.

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