Bank-firm relationships and the value of cash: Evidence from the financial crisis in Japan

We examine the effect of bank-firm relationships on the marginal value of cash held by firms during the 2008 financial crisis using Japanese data. Our results show that (1) during the financial crisis, the close bank-firm relationships reduce the marginal value of cash. In particular, the effect is stronger for financially distressed firms. (2) Financially distressed firms with closer bank-firm relationships are less likely to save cash. These results are consistent with the information production hypothesis that close bank-firm relationships increase firms' ability to raise funds by encouraging banks to produce information, as a result, reducing the value of cash held by firms.