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The response of firms‘ investment and financing to adverse cash flow shocks: the role of bank relationships

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  • Fuss, Catherine
  • Vermeulen, Philip

Abstract

We test whether firms with a single bank are better shielded from loss of credit and investment cuts in periods of adverse cash flow shocks than firms with multiple bank relationships. Our estimates of the cash flow sensitivity of investment show that both types of firms are equally subject to financing constraints that bind only in the event of adverse cash flow shocks. In these periods, firms incur lower cuts in investment expenditures when they can obtain extra credit. In periods of adverse cash flow shocks, the probability of obtaining extra bank debt becomes more sensitive to the size and leverage of the firm. JEL Classification: D92

Suggested Citation

  • Fuss, Catherine & Vermeulen, Philip, 2006. "The response of firms‘ investment and financing to adverse cash flow shocks: the role of bank relationships," Working Paper Series 658, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2006658
    Note: 327651
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp658.pdf
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    References listed on IDEAS

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    Cited by:

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    6. F. De Sloover & K. Burggraeve & L. Dresse, 2012. "Belgian business investment in the context of the crisis," Economic Review, National Bank of Belgium, issue ii, pages 29-44, September.

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    More about this item

    Keywords

    financial constraints; firm financing; firm investment; lending relationships;
    All these keywords.

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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