Multiple Banking Relationships Research Articles

Multiple Banking Relationships and Credit Market Competition: What Benefits the Firm?

This paper empirically addresses the question of which are the benefits for a firm to borrow from multiple banks, by explicitly correcting the potential endogeneity of the firm's decision of whether to rely on (and on how may) multiple relationships through a two-stage conditional maximum likelihood (2SCML) estimation technique. The estimation procedure also allows an in-depth analysis of the determinants of the multiple banking choice. The results are consistent with the hypothesis that the likelihood of credit tightening is lower for firms having more lending relationships, and located in less concentrated credit markets. Banking power at firm level and at market level is detrimental to the firm, as it increases the probability of credit constraints. However, firms that engage in multiple relationships benefit from competition among lending banks in terms of a lower probability of tightening, though such competition does not fully outweigh the marginal effect of local banking market power. As for the multiple banking choice, larger, riskier, less profitable and more opaque firms prefer more lending ties, and the number of relationships is also positively related with credit market concentration. I interpret the findings as providing evidence that a key reason why firms rely on multiple banking is their desire to reduce the hold-up costs and the risk of being credit constrained.

Bank ownership type and banking relationships

We formulate and test hypotheses about the role of bank ownership type—foreign, state-owned, and private domestic banks—in banking relationships. Our application uses data from India, an important developing nation. The empirical results are consistent with all of our hypotheses with regard to foreign banks. First, these banks tend to establish relationships with relatively transparent firms. Second, firms that have relationships with foreign banks are more likely to enter into multiple banking relationships and to maintain a larger number of such relationships. Finally, firms banking with foreign banks are more likely than others to diversify relationships across bank ownership types. The data are also consistent with the hypotheses that firms with relationships with state-owned banks are relatively unlikely to maintain multiple banking relationships, tend to interact with a smaller number of banks, and less often diversify across ownership types.

Staying, Dropping, or Switching: The Impacts of Bank Mergers on SMEs

This paper studies the impact of bank mergers on firm-bank lending relationships using detailed loan contract data from Belgium. We argue that in order to accurately gauge the heterogeneous impacts of mergers, the analysis must distinguish borrowers not only by their relationship with the acquiring versus the target bank in a merger and by firm size, but also by whether they have single versus multiple-bank relationships. For single-relationship borrowers, it is necessary to go beyond the usual comparison of relationship continuation and discontinuation to analyze the three alternatives of staying, dropping, and switching. For multiple-relationship borrowers, relationship intensity also plays a role.

Effect of the Number of Banking Relationships on Credit Availability: Evidence from Panel Data of Spanish Small Firms

This paper investigates how the choice between single or multiple banking relationships affects credit availability for a complete panel of small and medium-sized Spanish firms. The results seem to indicate the existence of rationing, since a substitution relation has been found between trade and bank credit. We also analyse the relationship between the level of indebtedness and the interest rate for each group of firms. The results show that those SMEs that work with fewer financial intermediaries obtain fewer funds for the same increase in the interest rate, which indicates that these companies have more financial restraints.

The Causes and Consequences of Venture Capital Financing: An Analysis Based on a Sample of Italian Firms

The analysis of the determinants and the effects on firm performance of venture capital finance for a sample of Italian enterprises indicates that small, young and more innovative firms are more likely to be financed by a venture capitalist. Our results confirm that venture capital can help reduce financial constraints for firms that are more difficult for external investors to evaluate. We also show that larger firms resort to venture capitalists when their indebtedness with banks is high and we find evidence that venture capital financing is more frequent after periods of high growth and investment, a result that points to the advisory role of the venture capitalist. A novel result emerges: venture capital also finances firms with multiple banking relationships. In the presence of multiple lending, banks could have greater difficulty monitoring firms with asymmetric information; moreover, if firms default, banks are likely to have a weaker bargaining position. In these cases, the amount of bank credit is probably near its limit and firms need to resort to venture capital, a contract that reduces the amount of guarantees needed to access external finance.

The Response of Firms' Investment and Financing to Adverse Cash Flow Shocks: The Role of Bank Relationships

We test whether firms with a single bank are better shielded from loss of credit and investment cuts in periods of adverse cash flow shocks than firms with multiple bank relationships. Our estimates of the cash flow sensitivity of investment show that both types of firms are equally subject to financing constraints that bind only in the event of adverse cash flow shocks. In these periods, firms incur lower cuts in investment expenditures when they can obtain extra credit. In periods of adverse cash flow shocks, the probability of obtaining extra bank debt becomes more sensitive to the size and leverage of the firm.

Relationship lending: a survey of the literature

This paper reviews the recent literature on relationship lending. First, the effect of relationship lending on firm value is examined in the context of the event studies investigating the impact of announcement of bank loans on stocks of the borrowing firms. Second, the effects on funds availability, loan rates, and collateral requirements are appraised. Third, the evidence on the impact of the length of the relationship, multiple bank relationships, and distance from the lender are assessed. Fourth, the effect of bank consolidation on relationship banking and the role of de novo banks are discussed. Finally, the effects of deregulation and technology on community banks are examined. The evidence indicates that relationships increase funds availability and reduce loan rates. The evidence on the direction and magnitude of the length of relationships is mixed and multiple relationships reduce the value of any single borrower lender relationship. Small banks can maintain the advantages of relationship banking in spite of technological changes.

Relationship lending: a survey of the literature

This paper reviews the recent literature on relationship lending. First, the effect of relationship lending on firm value is examined in the context of the event studies investigating the impact of announcement of bank loans on stocks of the borrowing firms. Second, the effects on funds availability, loan rates, and collateral requirements are appraised. Third, the evidence on the impact of the length of the relationship, multiple bank relationships, and distance from the lender are assessed. Fourth, the effect of bank consolidation on relationship banking and the role of de novo banks are discussed. Finally, the effects of deregulation and technology on community banks are examined. The evidence indicates that relationships increase funds availability and reduce loan rates. The evidence on the direction and magnitude of the length of relationships is mixed and multiple relationships reduce the value of any single borrower lender relationship. Small banks can maintain the advantages of relationship banking in spite of technological changes.

Multiple versus Single Banking Relationships in an Emerging Market: Some Taiwanese Evidence

This study examines the relationship between how firms borrow from banks and various corporate financial characteristics in an emerging economy. Using Taiwanese listed firms over the 1990-2002 period, we find, on the one hand, that older firms tend to maintain a close relationship with a single bank without private information disclosure (i.e. without public debt), in order to benefit from efficient monitoring and avoid information leakage. Larger firms, on the other hand, tend to maintain multiple relationships with banks (requiring duplicate or inefficient monitoring and higher agency costs) with public debt (i.e. private information disclosure). Furthermore, older firms seem to exhibit higher profitability than larger firms. Firms with multiple banking relationships appear to have higher leverage, lower performance (Tobin's Q), higher bank debt ratios, lower fixed assets ratios, and higher collateral requirements than those firms with close single banking relationships. Firms with single banking relationships seem to have stronger financial structures and better loan terms than firms with multiple banking relationships. When firms choose to issue public debt, those with single banking relationships will suffer as a result of severely unfavorable loan terms such as higher collateral required and higher earnings volatility. However, on the other hand, they will exhibit a better financial structure, such as a higher Tobin's Q, lower financial risk (leverage) and lower bank debt ratios among all of the sub-groups. Hence, efficient monitoring associated with private information disclosure to the public will lead to better financial characteristics of firms. However, once this close relationship is broken due to the issue of public debt, unfavorable collateral requirements will follow. Interestingly, when firms that maintain multiple banking relationships choose to issue public debt, this sub-group will appear to have the worst financial structure, such as the lowest Tobin's Q, highest financial risk (leverage) and highest bank debt ratios among all the sub-groups. Hence, inefficient monitoring associated with the disclosure of private information to competitors will result in the worst financial characteristics of firms.

Single versus Multiple Main Bank Relationships: Evidence from Japan

In this study, we investigate whether multiple main bank relationships reduce the so-called hold-up of bank financing (Rajan (1992)) by examining the panel data of Japanese companies listed on the Tokyo Stock Exchange, first and second sections during the period from 1991 to 1998. Our empirical results show that main bank borrowing is negatively related to the profitability of the firm, which suggests the significant presence of holdup costs. However, multiple main bank relationships reduce the holdup costs and lead to higher profitability. This mitigating effect of multiple main bank relationships is larger for firms with higher value of growth opportunities than firms with lower value of growth opportunities.

Bankruptcy around the World: Explanations of Its Relative Use

The law and finance literature highlights the role of investor rights in financial development, firm corporate governance, and financing patterns. For a panel of 35 countries, we investigate how bankruptcy use relates to countries’ creditor rights and judicial efficiency. Bankruptcies are higher in countries with more creditor rights, except for a “no automatic stay on assets” provision. Higher judicial efficiency is associated with more bankruptcies and appears as a substitute with more creditor rights. Although only a first step, our findings suggest creditor rights are complex, balancing prioritization of claims, ex ante risk-taking incentives, and an efficient resolution of distressed firms.

La multibancarité des entreprises

<titre>R&#233;sum&#233;</titre> Nous v&#233;rifions empiriquement l&#8217;impact de la qualit&#233; d&#8217;une entreprise sur le nombre et la concentration des banques qui la financent en nous fondant sur les conclusions de la litt&#233;rature th&#233;orique. Nous utilisons un &#233;chantillon de pme industrielles fran&#231;aises pour lesquelles nous disposons de donn&#233;es comptables et d&#8217;informations relatives &#224; l&#8217;octroi de pr&#234;ts bancaires. Le nombre total de banques aupr&#232;s desquelles les firmes s&#8217;endettent appara&#238;t d&#8217;autant plus &#233;lev&#233; que la qualit&#233; des entreprises est faible, de mani&#232;re &#224; &#233;chapper &#224; une surveillance trop &#233;troite. En revanche, la qualit&#233; des entreprises ne semble que peu li&#233;e, et n&#233;gativement, avec leur strat&#233;gie de nouer une relation privil&#233;gi&#233;e avec plusieurs banques, strat&#233;gie suppos&#233;e permettre de ne pas subir de capture informationnelle.

Secured Lending and Borrowers' Riskiness

This paper investigates the relationship between secured lending and borrowers' riskiness. First it builds a theoretical model showing that banks may find optimal to cover higher credit risk by requiring a guarantee and simultaneously charging higher interest rates. Second, it finds empirical support for the predictions of the model, showing that banks normally require guarantees on loans that are likely to be riskier, because they are larger and they are granted to borrowers of smaller size, less capitalized, and with multiple banking relationships. It also provides evidence that that another important set of characteristics that make it more likely that a bank loan will be secured is the availability for the borrower of assets that can be posted as collateral. Third, it shows that interest rates on secured loans are higher than on unsecured loans, confirming that guarantees are indeed required to ex-ante riskier borrowers and that their presence is not sufficient to completely offset their higher riskiness.

Multiple Banking Relationships: Evidence from the Italian Experience

Despite the growing theoretical literature on multiple banking relationships, empirical studies investigating the determinants of the number of bank–lending relationships are very scant. The purpose of this paper is to fill this gap. Using a new data set provided by a large Italian bank we provide econometric evidence that the number of banking relationships is increasing in firms’ leverage and in the riskiness of the sector in which the firm operates. This evidence suggests that firms must engage in multiple banking relationships in order to satisfy their demand for leverage and is consistent with an interpretation of the multiple banking relationship ‘puzzle’ based on the behaviour of the bank. A large bank may find it optimal to finance many firms for a small share of their total leverage rather than fully financing a smaller number of firms in order to share risk and to maximize the number of customers.

The duration of bank relationships

We analyze the duration of bank relationships using a unique panel data set of listed firms and their banks from the bank-dominated Norwegian market. We find that firms are more likely to leave a bank as the relationship matures. Small, profitable, and highly leveraged firms maintain shorter bank relationships, as do firms with multiple bank relationships. These findings are robust to censoring, alternate specifications for the distribution of relationship duration, and other control variables relevant to the Norwegian market. Overall, our results cast doubt on theories suggesting that firms become locked into bank relationships.

Bank Relationships and Firm Profitability

This paper examines how bank relationships affect firm performance. An empirical implication of recent theoretical models is that firms maintaining multiple bank relationships are less profitable than their single-bank peers. We investigate this empirical implication using a data set containing virtually all Norwegian publicly listed firms for the period 1979-1995. We find that profitability is substantially higher if firms maintain only a single bank relationship. We also find that firms replacing a single bank relationship are on average smaller and younger than firms not replacing a single bank relationship.

Multiple versus Single Banking Relationships: Theory and Evidence

A theory of the optimal number of banking relationships is developed and tested using matched bank‐firm data. According to the theory, relationship banks may be unable to continue funding profitable projects owing to internal problems and a firm may thus have to refinance from nonrelationship banks. The latter, however, face an adverse selection problem, as they do not know the quality of the project, and may refuse to lend. In these circumstances, multiple banking can reduce the probability of an early liquidation of the project. The empirical evidence supports the predictions of the model.

What Determines the Number of Bank Relationships? Cross-Country Evidence

We investigate the determinants of multiple-bank relationships using a new data set comprising 1079 firms across 20 European countries. We document large cross-country variation in the average number of bank relationships per firm, uncovering a richness in European financial systems that extends beyond the standard description of being “bank-dominated”. After controlling for a variety of firm-specific characteristics, we find that firms maintain more bank relationships, on average, in countries with inefficient judicial systems and poor enforcement of creditor rights. Firms also maintain more relationships in countries with unconcentrated but stable banking systems and active public bond markets. Journal of Economic Literature Classification Numbers: G21, C41.

Bank Relationships and Firm Profitability

This paper examines how bank relationships affect firm performance. An empirical implication of recent theoretical models is that firms maintaining multiple bank relationships are less profitable than their single-bank peers. We investigate this empirical implication using a data set containing virtually all Norwegian publicly listed firms for the period 1979-1995. We find that sales profitability is substantially higher if firms maintain only a single bank relationship. Furthermore, we observe that firms switching a single bank relationship improve their sales profitability.

Multiple banking relationships and the fragility of corporate borrowers

The widespread Italian practice of multiple borrowing has been studied with respect to the continuity of bank lending and to the interest rates charged to individual borrowers. However, there is a lack of empirical evidence on the effects of multiple credit relationships over the fragility of the corporate borrowers. Two theses are competing: one asserts that multiple borrowing results in a desirable sharing of risks; the other, that the parcellization of loans substantially weakens the discipline exercised by the banks and makes corporate borrowers more fragile. Through multivariate techniques, we check whether the indicators describing the structure of lending relationships can help, along with balance-sheet variables, to separate healthy from failed firms. This exercise shows that multiple banking relationships are associated with a higher riskiness of the borrowers, even though the impact is moderate in comparison with the importance of real and financial variables derived from balance sheets.