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No Bank, One Bank, Several Banks: Does It Matter for Investment?

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  • Sonia Ruano

    (Bank of Spain)

  • Robert M. Townsend

    (MIT)

  • Jesus Saurina

    (Bank of Spain)

  • Alexander Karaivanov

    (Simon Fraser University)

Abstract

This paper examines whether financial constraints affect firms’ investment decisions for older (larger) firms. We compare a group of unbanked firms to firms that rely on formal financing. Specifically, we combine data from the Spanish Mercantile Registry and the Bank of Spain Credit Registry (CIR) to classify firms according to their number of banking relations: one, several, or none. Our empirical strategy combines two approaches based on a common theoretical model. First, using a standard Euler equation adjustment cost approach to investment, we find that single-banked firms in our sample are most likely to exhibit cash flow sensitivity while unbanked firms are not. Second, using structural maximum likelihood estimation, we find that unbanked firms have a financial structure which is close to credit subject to moral hazard with unobserved effort, whereas single-banked firms have a financial structure which is more limited, as in an exogenously imposed traditional debt model. Firms in the unbanked category do not rely on bonds, equity, or formal financial markets, but rather on other firms in a financial or family-tied group (with either pyramidal or informal structure). We are among the first to document the importance of such groups in a European country. We control for reverse causality by treating bank relationships as endogenous and/or by appropriate stratifications of the sample.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2010 Meeting Papers with number 669.

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Date of creation: 2010
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Handle: RePEc:red:sed010:669

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  1. David Sraer & David Thesmar, 2007. "Performance and Behavior of Family Firms: Evidence from the French Stock Market," Journal of the European Economic Association, MIT Press, vol. 5(4), pages 709-751, 06.
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  10. Luigi Guiso & Raoul Minetti, 2010. "The Structure of Multiple Credit Relationships: Evidence from U.S. Firms," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1037-1071, 09.
  11. Santiago Carbó Valverde & Francisco Rodríguez-Fernández & Gregory F. Udell, 2008. "Bank lending, financing constraints and SME investment," Working Paper Series WP-08-04, Federal Reserve Bank of Chicago.
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Cited by:
  1. Alexander Karaivanov & Robert M. Townsend, 2013. "Dynamic Financial Constraints: Distinguishing Mechanism Design from Exogenously Incomplete Regimes," NBER Working Papers 19617, National Bureau of Economic Research, Inc.
  2. Claessens, Stijn & Ueda, Kenichi & Yafeh, Yishay, 2010. "Financial Frictions, Investment, and Institutions," CEPR Discussion Papers 8170, C.E.P.R. Discussion Papers.

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