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Bank-firm relationship in a developing country: Evidence from Indonesia

Author

Listed:
  • Muhammad Fuad

    (Universitas Muhammadiyah Purwokerto)

  • Suad Husnan

    (Universitas Muhammadiyah Purwokerto)

Abstract

This study aims to examine the association between banks and firms in a loan. Our data set was pooled cross section data from 2014 to 2016, with long-term loans of firms listed in Indonesia Stock Exchange as a unit of analysis. We estimate our regression model using ordinary least square (OLS) estimator. The results revealed that lower-risk banks tend to associate with riskier but well-performing firms. Similarly, lower-capital banks tend to associate with riskier but well-performing firms. These results are quite contrary to previous studies conducted in developed countries. Lower risk banks have relationship with riskier and well-performing firms in condition that the amount of loan is small enough to be considered safe. Meanwhile, lower capital banks in this study, especially in Indonesia, may face the geographical problem which drives cost so high that makes banks charge higher interest to possibly riskier firms. This study makes contribution by providing evidence from a relative fragmented credit market. Future research on this topic is encouraged to look out more detail especially in the causality interpretation. Key Words:Lending Relationship, Bank-Firm Association, Loan Matching, Relationship Lending

Suggested Citation

  • Muhammad Fuad & Suad Husnan, 2022. "Bank-firm relationship in a developing country: Evidence from Indonesia," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 11(10), pages 140-150, December.
    • Handle: RePEc:rbs:ijbrss:v:11:y:2022:i:10:p:140-150
    DOI: 10.20525/ijrbs.v11i10.2250
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    References listed on IDEAS

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