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Bank concentration and financial constraints on firm investment in UK

  • Saeed Abubakr
  • Franco Esposito
Registered author(s):

    Purpose – The purpose of this paper is to investigate the impact of bank concentration on firm financial constraints to perform investment across two types of financial constraints firms. Design/methodology/approach – The authors analyse this relationship by estimating the investment-cash flow sensitivity across groups of firms classified according to debt maturity structure model. The firms were classified as short-term and long-term debt dependent firms. Empirically the authors analyze a sample that consists of the most recent dataset (over 2001-2009) of UK firms that engage in foreign direct investment by using fixed-effects and GMM-IV estimation techniques. Findings – Bank concentration was found to relax financial constraints on firm level investment. Results indicate that higher level financial constraints are associated with short-term debt dependent firms that exhibit high level of investment-cash flow sensitivity. Further, it was found that bank concentration is associated with reduction in financial constraints on firm investment and this effect is stronger for short-term debt dependent firms. Originality/value – Unlike previous studies, the paper investigates the bank concentration effects on UK foreign direct investing firms that are uniquely classified; based on distinctive dimension of financial frictions in capital market. Estimated results ascertain that information-based hypothesis is pertinent to the UK capital market.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=1086-7376&volume=29&issue=1&articleid=17019419&show=abstract
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    Article provided by Emerald Group Publishing in its journal Studies in Economics and Finance.

    Volume (Year): 29 (2012)
    Issue (Month): 1 (March)
    Pages: 11-25

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    Handle: RePEc:eme:sefpps:v:29:y:2012:i:1:p:11-25
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    1. De Maeseneire, W. & Claeys, T., 2007. "SMES, FDI and financial constraints," Vlerick Leuven Gent Management School Working Paper Series 2007-25, Vlerick Leuven Gent Management School.
    2. Nicola Cetorelli, 1997. "The role of credit market competition on lending strategies and on capital accumulation," Working Paper Series, Issues in Financial Regulation WP-97-14, Federal Reserve Bank of Chicago.
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    4. Moretti, Luigi, 2008. "Bank Concentration and Structure of Manufacturing Sectors: Differences Between High and Low Income Countries," MPRA Paper 18867, University Library of Munich, Germany.
    5. Vlad Manole & Mariana Spatareanu, 2009. "Exporting, Capital Investment and Financial Constraints," LICOS Discussion Papers 25209, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
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    7. Heitor Almeida & Murillo Campello, 2006. "Financial Constraints, Asset Tangibility, and Corporate Investment," NBER Working Papers 12087, National Bureau of Economic Research, Inc.
    8. Ratti, Ronald A. & Lee, Sunglyong & Seol, Youn, 2008. "Bank concentration and financial constraints on firm-level investment in Europe," Journal of Banking & Finance, Elsevier, vol. 32(12), pages 2684-2694, December.
    9. Astrid A. Dick, 2006. "Nationwide Branching and Its Impact on Market Structure, Quality, and Bank Performance," The Journal of Business, University of Chicago Press, vol. 79(2), pages 567-592, March.
    10. Mark G. Guzman, 1999. "Bank structure, capital accumulation and growth: a simple macroeconomic model," Working Papers 9907, Federal Reserve Bank of Dallas.
    11. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
    12. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
    13. Robert Marquez, 2002. "Competition, Adverse Selection, and Information Dispersion in the Banking Industry," Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 901-926.
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