Relationship Banking, Liquidity, and Investment in the German Industrialization

Posted: 21 Dec 1998

See all articles by Caroline Fohlin

Caroline Fohlin

Emory University; Centre for Economic Policy Research (CEPR)

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Close bank relationships are thought to ameliorate firms' liquidity constraints--a phenomenon frequently measured by liquidity sensitivity of investment. Using a panel of German firms during the formative years of universal banking 1903-1913), this paper shows that, even controlling for selection bias, investment is more sensitive to internal liquidity for bank-networked firms than unattached firms. The firm exhibiting the greatest liquidity sensitivity, however, faced no apparent liquidity constraints. The findings yield two implications: they support recent research rejecting a linear relationship between liquidity sensitivity and financing constraints, and they suggest that relationship banking provides no consistent lessening of firms' liquidity sensitivity.

Suggested Citation

Fohlin, Caroline, Relationship Banking, Liquidity, and Investment in the German Industrialization. Available at SSRN:

Caroline Fohlin (Contact Author)

Emory University ( email )

Dept. of Economics
Atlanta, GA Georgia 30322
United States
4047276363 (Phone)

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Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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