Do bank lending relationships always enhance financial distress resolution? The case of Germany

Abstract

This article examines the financial distress resolution benefit of bank lending relationships in a system where because of the lack of access to public debt and equity markets, banks do not face competition as providers of capital. For a sample of German firms, this article finds that companies in financial distress are more likely to be liquidated if they have high amounts of bank debt. Furthermore, companies that are saved show higher potential for financial distress a year prior to bankruptcy. This suggests that certain aspects of value of bank lending relationships are dependent on the financial system in which they occur.