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Bank concentration and financial constraints on firm-level investment in Europe

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  • Ratti, Ronald A.
  • Lee, Sunglyong
  • Seol, Youn

Abstract

This study examines the effect of bank concentration on financing constraints of non-financial firms in 14 European countries between 1992 and 2005. Using firm-level data we analyze financial constraints with the Euler equation derived from the dynamic investment model. We find that with a highly concentrated banking sector firms are less financially constrained. This result is robust to consideration of firm opacity, firm size, and business cycle. Relaxation of financial constraint while greater for firms in less opaque industries also accrues for firms in more opaque industries. Greater bank concentration is associated with less tight financial constraint during both expansions and recessions. Results overall are consistent with an information-based hypothesis that more market power increases banks' incentives to produce information on potential borrowers. Findings are robust to consideration of country specific institutional factors.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 12 (December)
Pages: 2684-2694

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:12:p:2684-2694

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Firm-level investment Opaque industries Financial constraints Bank concentration;

References

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Cited by:
  1. Lee, Sangwoo & Park, Kwangwoo & Shin, Hyun-Han, 2009. "Disappearing internal capital markets: Evidence from diversified business groups in Korea," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 326-334, February.
  2. Koetter, Michael & Poghosyan, Tigran, 2009. "The identification of technology regimes in banking: Implications for the market power-fragility nexus," Journal of Banking & Finance, Elsevier, vol. 33(8), pages 1413-1422, August.
  3. Brown, Christine & Davis, Kevin, 2009. "Capital management in mutual financial institutions," Journal of Banking & Finance, Elsevier, vol. 33(3), pages 443-455, March.
  4. Saeed Abubakr & Franco Esposito, 2012. "Bank concentration and financial constraints on firm investment in UK," Studies in Economics and Finance, Emerald Group Publishing, vol. 29(1), pages 11-25, March.
  5. Ruth Guillén & Bernarda Pinilla, 2010. "Effects of bank mergers on concentration and efficiency of the venezuelan banking system, 1998-2005," Economía, Instituto de Investigaciones Económicas y Sociales (IIES). Facultad de Ciencias Económicas y Sociales. Universidad de Los Andes. Mérida, Venezuela, vol. 35(30), pages 103-142, July-Dece.
  6. Gochoco-Bautista, Maria Socorro & Sotocinal, Noli R. & Wang, Jianxin, 2014. "Corporate Investments in Asian Markets: Financial Conditions, Financial Development, and Financial Constraints," World Development, Elsevier, vol. 57(C), pages 63-78.

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