Advertisement

The Value of Bank Relationship: Evidence from China

  • Chyi-Lun ChiouEmail author
Conference paper
Part of the Lecture Notes in Computer Science book series (LNCS, volume 11588)

Abstract

This study investigates the influence of bank relationship on the firm’s preference on liquidity. We address whether previous bank relationship affects firm value by examining how the value of cash holdings varies with bank relationship. Furthermore, we conduct how financial frictions alter the association between bank relationship and firm value. Using a sample of Chinese listed companies approved bank loans over the period 2008–2017, we find two supportive evidences on bank relationship. First, the marginal value of cash holdings decreases with the depth of bank relationship. Second, the negative impact of the bank relationship on the marginal value of cash holdings is more apparent for financial unconstrained companies. The results suggest that bank relationship is useful to alleviate the information asymmetry problem between the borrower and outside investors and thereby decreases a firm’s need and valuation of liquidity. The investigation of bank relationship under distinct financial friction scenarios further supports the unique role of banks in dealing with information asymmetry. Compared to financial unconstrained companies, financial constrained firms is more vulnerable to holdup problem making them hard to experience the benefit of bank relationship. In sum, our study contributes to the literature of the value of bank relationship by showing that the marginal value of cash holdings decreases with close tie with banks because of the ease in information asymmetry.

Keywords

Bank relationship Information asymmetry Marginal value of cash holdings 

Notes

Acknowledgments

The author gratefully acknowledged the financial support of the Ministry of Science and Technology, Taiwan, R.O.C. under Grant no. MOST 104-2410-H-030-012.

References

  1. Bates, T.W., Kahle, K.M., Stulz, R.M.: Why do US firms hold so much more cash than they used to? J. Financ. 64(5), 1985–2021 (2009)CrossRefGoogle Scholar
  2. Berger, A.N., Udell, G.F.: Relationship lending and lines of credit in small firm finance. J. Bus. 68(3), 351–381 (1995)CrossRefGoogle Scholar
  3. Bonfim, D., Dai, Q., Franco, F.: The number of bank relationships and borrowing costs: the role of information asymmetries. J. Empir. Financ. 46, 191–209 (2018)CrossRefGoogle Scholar
  4. Campbel, T.S., Kracaw, W.A.: Information production, market signalling, and the theory of financial intermediation. J. Financ. 35(4), 863–882 (1980)CrossRefGoogle Scholar
  5. Chang, C., Liao, G., Yu, X., Ni, Z.: Information from relationship lending: evidence from loan defaults in China. J. Money Credit. Bank. 46(6), 1225–1257 (2014)CrossRefGoogle Scholar
  6. Denis, D.J., Sibilkov, V.: Financial constraints, investment, and the value of cash holdings. Rev. Financ. Stud. 23(1), 247–270 (2010)CrossRefGoogle Scholar
  7. Diamond, D.W.: Financial intermediation and delegated monitoring. Rev. Financ. Stud. 51(3), 393–414 (1984)MathSciNetzbMATHGoogle Scholar
  8. Diamond, D.W.: Monitoring and reputation: the choice between bank loans and directly placed debt. J. Polit. Econ., 99, 689–721 (1991)CrossRefGoogle Scholar
  9. Fama, E.F.: What’s different about banks? J. Financ. Intermediation 15(1), 29–39 (1985)Google Scholar
  10. Faulkender, M., Wang, R.: Corporate financial policy and the value of cash. J. Financ. 61(4), 1957–1990 (2006)CrossRefGoogle Scholar
  11. Houston, J., James, C.: Bank information monopolies and the mix of private and public debt claims. J. Financ. 51(5), 1863–1889 (1996)CrossRefGoogle Scholar
  12. Hu, H., Lian, Y., Su, C.-H.: Do bank lending relationships affect corporate cash policy? Rev. Account. Financ. 15(4), 394–415 (2016)CrossRefGoogle Scholar
  13. James, C.: Some evidence on the uniqueness of bank loans. J. Financ. Econ. 19(2), 217–235 (1987)CrossRefGoogle Scholar
  14. Keynes, J.M.: The General Theory of Employment, Interest and Money. McMillan, London (1936)Google Scholar
  15. Khurana, I.K., Martin, X., Pereira, R.: Financial development and the cash flow sensitivity of cash. J. Financ. Quant. Anal. 41(04), 787–808 (2006)CrossRefGoogle Scholar
  16. Kusnadi, Y., Yang, Z., Zhou, Y.: Institutional development, state ownership, and corporate cash holdings: evidence from China. J. Bus. Res. 68(2), 351–359 (2015)CrossRefGoogle Scholar
  17. Lin, C., Ma, Y., Malatesta, P., Xuan, Y.: Ownership structure and the cost of corporate borrowing. J. Financ. Econ. 100(1), 1–23 (2011)CrossRefGoogle Scholar
  18. Lins, K.V., Servaes, H., Tufano, P.: What drives corporate liquidity? An international survey of cash holdings and lines of credit. J. Financ. Econ. 98(1), 160–176 (2010)CrossRefGoogle Scholar
  19. Modigliani, F., Miller, M.H.: The cost of capital, corporation finance and the theory of investment. Am. Econ. Rev. 48(3), 261–297 (1958)zbMATHGoogle Scholar
  20. Myers, S.C., Majluf, N.S.: Corporate financing and investment decisions when firms have information that investors do not have. J. Financ. Econ. 13(2), 187–221 (1984)CrossRefGoogle Scholar
  21. Opler, T., Pinkowitz, L., Stulz, R., Williamson, R.: The determinants and implications of corporate cash holdings. J. Financ. Econ. 52(1), 3–46 (1999)CrossRefGoogle Scholar
  22. Petersen, M.A., Rajan, R.G.: The benefits of lending relationships: Evidence from small business data. J. Financ. 49(1), 3–37 (1994)CrossRefGoogle Scholar
  23. Pinkowitz, L., Williamson, R.: Bank power and cash holdings: Evidence from Japan. Rev. Financ. Stud. 14(4), 1059–1082 (2001)CrossRefGoogle Scholar
  24. Prilmeier, R.: Why do loans contain covenants? Evidence from lending relationships. J. Financ. Econ. 123(3), 558–579 (2017)CrossRefGoogle Scholar
  25. Qian, M., Yeung, B.Y.: Bank financing and corporate governance. J. Corp. Financ. 32, 258–270 (2015)CrossRefGoogle Scholar
  26. Rajan, R.G.: Insiders and outsiders: the choice between informed and arm’s-length debt. J. Financ. 47(4), 1367–1400 (1992)CrossRefGoogle Scholar
  27. Ramakrishnan, R.T.S., Thakor, A.V.: Information reliability and a theory of financial intermediation. Rev. Econ. Stud. 51(3), 415–432 (1984)MathSciNetCrossRefGoogle Scholar
  28. Santos, J.A.C., Winton, A.: Bank loans, bonds, and information monopolies across the business cycle. J. Financ. 63(3), 1315–1359 (2008)CrossRefGoogle Scholar
  29. Schenone, C.: Lending relationships and information rents: do banks exploit their information advantages? Rev. Financ. Stud. 23(3), 1149–1199 (2010)CrossRefGoogle Scholar

Copyright information

© Springer Nature Switzerland AG 2019

Authors and Affiliations

  1. 1.Fu Jen Catholic UniversityNew Taipei CityTaiwan

Personalised recommendations