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Relationship Lending and Financing Constraints: Firm-Level Evidence for India

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  • Ghosh, Saibal

Abstract

Using a panel dataset of over 800 listed manufacturing firms for 1995-2005, the paper examines whether bank-firm relationships influence a firm’s financing constraints. The results indicate that a firm with fewer related banks maintains less cash and its equivalents even in the presence of potential investment opportunities. This suggests that establishing a close loan relationship with few banks could reduce the cost of private loans, enabling the firm to maintain lower liquidity levels. The analysis concludes with several robustness checks of the baseline results.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 24253.

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Date of creation: Jan 2007
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Handle: RePEc:pra:mprapa:24253

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Keywords: investment; financing constraints; bank-firm relationship; India;

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References

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  1. Berger, Allen N. & Klapper, Leora F. & Udell, Gregory F., 2001. "The ability of banks to lend to informationally opaque small businesses," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2127-2167, December.
  2. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  3. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
  4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  5. Caprio,Gerard & Honohan,Patrick & Stiglitz,Joseph E. (ed.), 2006. "Financial Liberalization," Cambridge Books, Cambridge University Press, number 9780521030991.
  6. Detragiache, Enrica & Garella, Paolo & Guiso, Luigi, 1997. "Multiple Versus Single Banking Relationships," CEPR Discussion Papers 1649, C.E.P.R. Discussion Papers.
  7. Harris, John R & Schiantarelli, Fabio & Siregar, Miranda G, 1994. "The Effect of Financial Liberalization on the Capital Structure and Investment Decisions of Indonesian Manufacturing Establishments," World Bank Economic Review, World Bank Group, vol. 8(1), pages 17-47, January.
  8. Harhoff, Dietmar & Korting, Timm, 1998. "Lending relationships in Germany - Empirical evidence from survey data," Journal of Banking & Finance, Elsevier, vol. 22(10-11), pages 1317-1353, October.
  9. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  10. Boot, Arnoud W A & Thakor, Anjan, 1997. "Can Relationship Banking Survive Competition?," CEPR Discussion Papers 1592, C.E.P.R. Discussion Papers.
  11. International Monetary Fund, 2005. "Monetary Policy and Corporate Behaviour in India," IMF Working Papers 05/25, International Monetary Fund.
  12. Takeo Hoshi & Anil Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  13. Michael Devereux & Fabio Schiantarelli, 1990. "Investment, Financial Factors, and Cash Flow: Evidence from U.K. Panel Data," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 279-306 National Bureau of Economic Research, Inc.
  14. Gaston Gelos & Alejandro M. Werner, 1999. "Financial Liberalization, Credit Constraints, and Collateral - Investment in the Mexican Manufacturing Sector," IMF Working Papers 99/25, International Monetary Fund.
  15. Chhibber, Pradeep K & Majumdar, Sumit K, 1999. "Foreign Ownership and Profitability: Property Rights, Control, and the Performance of Firms in Indian Industry," Journal of Law and Economics, University of Chicago Press, vol. 42(1), pages 209-38, April.
  16. Ghosh, Saibal, 2006. "Did financial liberalization ease financing constraints? Evidence from Indian firm-level data," Emerging Markets Review, Elsevier, vol. 7(2), pages 176-190, June.
  17. Rajan, Raghuram G, 1992. " Insiders and Outsiders: The Choice between Informed and Arm's-Length Debt," Journal of Finance, American Finance Association, vol. 47(4), pages 1367-400, September.
  18. Saibal Ghosh, 2005. "Does leverage influence banks' non-performing loans? Evidence from India," Applied Economics Letters, Taylor and Francis Journals, vol. 12(15), pages 913-918.
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