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Banks, industrial relatedness and firms’ investments

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  • Roberto Antonietti
  • Giulio Cainelli
  • Monica Ferrari
  • Stefania Tomasini

Abstract

In this paper, we study whether industrial relatedness affects firms’ fixed investment behaviour, and whether this relationship is linked also to the operational and organizational proximity between banks and local economies. By estimating different specifications of a dynamic investment equation on an unbalanced panel of Italian manufacturing firms for the period 2000-2007, we find that industrial relatedness boosts fixed investments by lowering their sensitivity to cash flow. This occurs because in technologically related areas banks benefit from lower screening and monitoring costs, easier re-allocation of property rights, and higher likelihood of establishing extended credit relationships with firms. However, we find also that the positive effect of industrial relatedness on investments disappears as the functional distance between local branches and their headquarters increases: more hierarchical and less embedded banks find it more difficult to collect tacit information on inter-firm production and financial linkages at the local level and therefore reduce credit provision.

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Bibliographic Info

Paper provided by Utrecht University, Section of Economic Geography in its series Papers in Evolutionary Economic Geography (PEEG) with number 1402.

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Length: 14 pages
Date of creation: Jan 2014
Date of revision: Jan 2014
Handle: RePEc:egu:wpaper:1402

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Keywords: error correction model; fixed investments; industrial relatedness; functional distance; operational proximity;

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  1. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2010. "Bank size or distance: what hampers innovation adoption by SMEs?," Journal of Economic Geography, Oxford University Press, vol. 10(6), pages 845-881, November.
  2. Allen N. Berger & Gregory F. Udell, 2001. "Small business credit availability and relationship lending: the importance of bank organizational structure," Finance and Economics Discussion Series 2001-36, Board of Governors of the Federal Reserve System (U.S.).
  3. Giulio Cainelli & Sandro Montresor & Giuseppe Vittucci Marzetti, 2012. "Production and financial linkages in inter-firm networks: structural variety, risk-sharing and resilience," Journal of Evolutionary Economics, Springer, vol. 22(4), pages 711-734, September.
  4. Mitchell A. Petersen & Raghuram G. Rajan, 2000. "Does Distance Still Matter? The Information Revolution in Small Business Lending," NBER Working Papers 7685, National Bureau of Economic Research, Inc.
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  8. Pietro Alessandrini & Andrea F. Presbitero & Alberto Zazzaro, 2009. "Banks, Distances and Firms' Financing Constraints," Review of Finance, European Finance Association, vol. 13(2), pages 261-307.
  9. Hart, Oliver, 1995. "Firms, Contracts, and Financial Structure," OUP Catalogue, Oxford University Press, number 9780198288817.
  10. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  11. Xavier Giroud, 2013. "Proximity and Investment: Evidence from Plant-Level Data," The Quarterly Journal of Economics, Oxford University Press, vol. 128(2), pages 861-915.
  12. Bean, Charles R, 1981. "An Econometric Model of Manufacturing Investment in the UK," Economic Journal, Royal Economic Society, vol. 91(361), pages 106-21, March.
  13. Kaplan, Steven N & Zingales, Luigi, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 169-215, February.
  14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
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