Bank Branch Proximity, Financial Flexibility and Corporate Liquidity Management

Firms hold less cash (i.e. internal-liquidity) when their local bank branching network is dense. The effect strengthens for small, opaque and financially constrained firms. Further, it weakens with distance and strengthens with urban vibrancy. Finally, firms located in dense local branch networks enjoy better access to bank credit lines with looser covenants (i.e. external-liquidity) and are able to mitigate investment contractions during economic downturns. Using a quasi-natural experiment, we confirm the causality of our results. Taken together, these findings suggest an economic link between financial agglomeration, financial flexibility and the real economy