No Lending Relationships and Liquidity Management of Small Businesses during a Financial Shock

We investigate the determinants of the end of lending relationships with banks using small business data. We also investigate how small businesses without lending relationships financed credit demand during the global financial shock. First, we find that firms with high internal cash holdings, lower growth, and low working capital were more likely to end lending relationships with banks. Supply-side effects on the determinants of the end of relationships are insignificant. Second, when firms experienced credit demand during the financial shock, those with lending relationships increased bank borrowings while those without lending relationships reduced internal cash. However, if we examine cash-rich firms, both firms with and without relationships reduced cash holdings to finance working capital during the shock period. Third, firm performance (in terms of profitability) was neither lower nor higher for firms that did not have lending relationships with banks during the shock period.