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Relationship Banking, Liquidity, and Investment in the German Industrialization

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  • Caroline Fohlin

    (California Institute of Technology)

Abstract

Close bank relationships are thought to ameliorate firms' liquidity constraints-a phenomenon frequently measured by liquidity sensitivity of investment. Using 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 constraint. 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. Copyright The American Finance Association 1998.

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Bibliographic Info

Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 53 (1998)
Issue (Month): 5 (October)
Pages: 1737-1758

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Handle: RePEc:bla:jfinan:v:53:y:1998:i:5:p:1737-1758

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