Do Bank Lending Relationships Always Enhance Financial Distress Resolution? The Case of Germany
 

Abstract

This paper looks at the financial distress resolution benefit of bank lending relationships in a system where due to 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 paper 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 upon the financial system in which they occur. In addition, the nature of the financial system seems to influence the economic efficiency of the bankruptcy process.