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Relationship Banking, Liquidity, and Investment in the German Industrialization

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  • Fohlin, Caroline

Abstract

Close bank relationships are thought to ameliorate firms' liquidity constraints-a phenomenon frequently measured by liquidity sensitivity of investment. Using German firms during the formative years of universal banking (1903-1913), this paper shows that, even controlling for selection bias, investment is more sensitive to internal liquidity for bank-networked firms than unattached firms. The firm exhibiting the greatest liquidity sensitivity, however, faced no apparent liquidity constraint. The findings yield two implications: they support recent research rejecting a linear relationship between liquidity sensitivity and financing constraints, and they suggest that relationship banking provides no consistent lessening of firms' liquidity sensitivity. Copyright The American Finance Association 1998.
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  • Fohlin, Caroline, 1996. "Relationship Banking, Liquidity, and Investment in the German Industrialization," Working Papers 913, California Institute of Technology, Division of the Humanities and Social Sciences.
  • Handle: RePEc:clt:sswopa:913
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    File URL: http://www.hss.caltech.edu/SSPapers/sswp913.pdf
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