Bank Market Concentration, Relationship Banking and Small Business Liquidity

Abstract

This paper examines two contrasting interpretations of how bank market concentration (Market Power Hypothesis) and banking relationships (Information Hypothesis) affect three sources of small firm liquidity (cash, lines of credit and trade credit). Supportive of a market power interpretation, we find that in a highly concentrated banking market, small firms hold less cash, have less access to lines of credit, are more financially constrained, use greater amounts of more expensive trade credit and face higher penalties for trade credit late payment. We also find support for the information hypothesis: relationship banking improves small business liquidity, particularly in a concentrated banking. Our results are robust to different cash, lines of credit and trade credit measures and to alternative empirical approaches.