The Value of Bank Relationship: Evidence from China

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.