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Banks, industrial relatedness and firms’ investments

Author

Listed:
  • Roberto Antonietti
  • Giulio Cainelli
  • Monica Ferrari
  • Stefania Tomasini

Abstract

In this paper, we study whether industrial relatedness affects firms’ fixed investment behaviour, and whether this relationship is linked also to the operational and organizational proximity between banks and local economies. By estimating different specifications of a dynamic investment equation on an unbalanced panel of Italian manufacturing firms for the period 2000-2007, we find that industrial relatedness boosts fixed investments by lowering their sensitivity to cash flow. This occurs because in technologically related areas banks benefit from lower screening and monitoring costs, easier re-allocation of property rights, and higher likelihood of establishing extended credit relationships with firms. However, we find also that the positive effect of industrial relatedness on investments disappears as the functional distance between local branches and their headquarters increases: more hierarchical and less embedded banks find it more difficult to collect tacit information on inter-firm production and financial linkages at the local level and therefore reduce credit provision.

Suggested Citation

  • Roberto Antonietti & Giulio Cainelli & Monica Ferrari & Stefania Tomasini, 2014. "Banks, industrial relatedness and firms’ investments," Papers in Evolutionary Economic Geography (PEEG) 1402, Utrecht University, Department of Human Geography and Spatial Planning, Group Economic Geography, revised Jan 2014.
  • Handle: RePEc:egu:wpaper:1402
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    File URL: http://econ.geo.uu.nl/peeg/peeg1402.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    error correction model; fixed investments; industrial relatedness; functional distance; operational proximity;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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