Firm investment, liquidity and bank health: A panel study of Asian firms in the 2000s

We find that the cash flow sensitivity of investment and cash holdings rises as bank health deteriorates. Moreover, the impact of non-performing loans on the cash flow sensitivity is more prevalent across firms in economies with a higher level of financial intermediary development. As financial intermediaries develop, firms become more dependent on bank credit and bank-dependent firms are more vulnerable to external shocks hitting the financial system. Therefore, when bank health is impaired, bank-dependent firms increase their reliance on internal funds and raise their propensity to save out of cash flow to materialize profitable investment opportunities in the future.