Relationship Banking, Liquidity, and Investment in the German Industrialization
36 Pages Posted: 13 Nov 1998
Date Written: December 16, 1997
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.
JEL Classification: N83
Suggested Citation: Suggested Citation