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The role of bank relationships when firms are financially distressed

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  • Höwer, Daniel

Abstract

Banks are better suited than other financing partners to process information in order to make efficient liquidations. But their ability depends on bank characteristics and incentives. In addition, the strength of the main bank relationship influences the bank’s ability to make efficient liquidations. I study the effect of bank characteristics and bank relationships in situations where firms are financially distressed. Do the chances of a financially distressed firm to improve or to close depend on the bank? Does the survival of a financially distressed firm depend on its main bank relationship? Using German data from 2000–2013, I analyze the effect of a bank’s organizational complexity, non-performing customers, and the strength of main bank relationships at the bank and firm level. I find that high shares of non-performing clients provide negative incentives. Banks can make more efficient liquidations if they are regionally active and have close relationships with the firm.

Suggested Citation

  • Höwer, Daniel, 2016. "The role of bank relationships when firms are financially distressed," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 59-75.
    • Handle: RePEc:eee:jbfina:v:65:y:2016:i:c:p:59-75
    DOI: 10.1016/j.jbankfin.2016.01.002
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    More about this item

    Keywords

    Financially distressed firms; Relationship banking; Bank type; Firm closure;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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