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Investment in Relationship-Specific Assets: Does Finance Matter?

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  • Martin Strieborny
  • Madina Kukenova

Abstract

Existing literature sees opportunistic behaviour of contractual partners as the main reason why rational agents underinvest in relationship-specific assets. We look beyond this well-know holdup problem and argue that financial vulnerability and short-term planning horizon can also lead to such underinvestment. Subsequently, banks can stimulate growth-enhancing investment in relationship-specific assets by signalling creditworthiness and long-term planning horizon of their borrowers. We empirically confirm this hypothesis by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a strong banking sector

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3349.

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Date of creation: 2011
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Handle: RePEc:ces:ceswps:_3349

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Keywords: financial development; relationship-specific investment; growth;

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Cited by:
  1. Heyman, Fredrik & Gustavsson Tingvall, Patrik, 2012. "The Dynamics of Offshoring and Institutions," Working Paper Series 919, Research Institute of Industrial Economics.
  2. Strieborny, Martin, 2013. "Suppliers, Investors, and Equity Market Liberalizations," Knut Wicksell Working Paper Series 2013/13, Knut Wicksell Centre for Financial Studies, Lund University.
  3. Tingvall, Patrik Gustavsson & Poldahl, Andreas, 2011. "Determinants of Firm R&D: The Role of Relationship-specific Interactions for R&D Spillovers," Working Paper Series in Economics and Institutions of Innovation 251, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.

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