This paper examines how changes in bank lending standards and credit market conditions affect the availability of bank credit and the value of banking relationships for a large sample of private and publicly held firms. Overall, we find that changes in bank lending standards have a much greater impact on the availability of credit for private than for publicly traded firms. We also find private firms hold more cash and substitute trade credit for bank loans when banks tighten lending standards, suggesting that private firms are more likely to be rationed. In addition, we find that banking relationships are associated with significantly higher private firm valuation multiples. Moreover we find that the value of banking relationships for private firms varies with bank lending standards—with relationships having greater value when banks are more selective in their lending decisions. Overall, the evidence suggests that credit crunches like the one that began in 2007 are likely to have a disproportionate impact on firms with limited access to capital markets.

The Erasmus Finance Seminar is jointly sponsored by ERIM and the Tinbergen Institute.