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Do Banks Influence the Capital Structure Choices of Firms?

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Author Info
Daniševská, P.
Jong, A. de
Verbeek, M.J.C.M. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
Abstract

This paper investigates three capital structure decisions – leverage, debt maturity and the source of debt – in a simultaneous setting. Moreover, we investigate whether these choices are influenced by the involvement of banks in a firm. Our results based on a panel of Dutch firms show that bank relationships, measured by interlocking board memberships and equity ownership, have a significant impact on the relations among the three capital structure choices. First, less bank involvement strengthens the positive impact of leverage on maturity. This is consistent with the liquidity risk theory, because involved banks help firms to mitigate liquidity risk. Second, bank debt negatively effects leverage in firms with bank interlocks, while this relation is absent in firms without such bank involvement. This result suggests that banks maximize the value of their loans by reducing overall leverage. Third, we find a strong trade-off between bank debt and maturity, which is independent of the degree of bank involvement.

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Paper provided by Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam. in its series Research Paper with number ERS-2004-040-F&A Revision_Date: 2009-07-29.

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Date of creation: 23 Jun 2004
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Handle: RePEc:dgr:eureri:30001462

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Related research
Keywords: capital structure; debt maturity; bank relationships; international economics; financial economics; source of debt;

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  1. Mark Carey & Mitch Post & Steven A. Sharpe, 1998. "Does Corporate Lending by Banks and Finance Companies Differ? Evidence on Specialization in Private Debt Contracting," Journal of Finance, American Finance Association, vol. 53(3), pages 845-878, 06. [Downloadable!] (restricted)
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  2. Wiggins, James B., 1990. "The Relation between Risk and Optimal Debt Maturity and the Value of Leverage," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(03), pages 377-386, September. [Downloadable!]
  3. Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May. [Downloadable!] (restricted)
  4. Shane A. Johnson, 2003. "Debt Maturity and the Effects of Growth Opportunities and Liquidity Risk on Leverage," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 16(1), pages 209-236.
  5. Johnson, Shane A., 1997. "An Empirical Analysis of the Determinants of Corporate Debt Ownership Structure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(01), pages 47-69, March. [Downloadable!]
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