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Bank relationships and small firms’ financial performance

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  • Annalisa Castelli
  • Gerald P. Dwyer
  • Iftekhar Hasan

Abstract

We examine the relationship between the number of bank relationships and firms’ performance, evaluating possible differential effects related to firms’ size. Our sample of firms from Italy includes many small firms, 99 percent of which are not listed and for which bank debt is a major source of financing. In the sample, 4 percent of the firms have a single bank relationship, and 66 percent of them have five or fewer relationships. We find that return on equity and return on assets decrease as the number of bank relationships increases, with a stronger relationship for small firms than for large firms. We also find that interest expense over assets increases as the number of relationships increases. Particularly for small firms, our results are consistent with analyses indicating that fewer bank relationships reduce information asymmetries and agency problems, which outweigh negative effects connected to holdup problems.

Suggested Citation

  • Annalisa Castelli & Gerald P. Dwyer & Iftekhar Hasan, 2006. "Bank relationships and small firms’ financial performance," FRB Atlanta Working Paper 2006-05, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2006-05
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    Cited by:

    1. António Pedro Soares Pinto & Mário Gomes Augusto & Pedro M. Gama, 2010. "Bank Relationships And Corporate Governance: A Survey Of The Literature From The Perspective Of Smes," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(1), pages 65-85.
    2. Etumudon Ndidi Asien, 2016. "Determinants of Number of Bankers by Listed Nigerian Firms," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 1-13, April.
    3. Braggion, Fabio & Ongena, Steven, 2013. "A Century of Firm – Bank Relationships: Did Banking Sector Deregulation Spur Firms to Add Banks and Borrow More?," CEPR Discussion Papers 9695, C.E.P.R. Discussion Papers.
    4. OGANE Yuta, 2017. "The Number of Bank Relationships and Bank Lending to New Firms: Evidence from firm-level data in Japan," Discussion papers 17112, Research Institute of Economy, Trade and Industry (RIETI).
    5. Raquel Lago González & Jose A. Lopez & Jesús Saurina, 2007. "Determinants of access to external finance: evidence from Spanish firms," Working Paper Series 2007-22, Federal Reserve Bank of San Francisco.
    6. repec:spr:anresc:v:59:y:2017:i:1:d:10.1007_s00168-017-0830-9 is not listed on IDEAS
    7. Catherine Refait-Alexandre & Stéphanie Serve, 2015. "« Multiple banking relationships: do SMEs mistrust their banks? »," Post-Print hal-01450968, HAL.
    8. Gajewski, Krzysztof & Pawłowska, Małgorzata & Rogowski, Wojciech, 2012. "Relacje firm z bankami w Polsce w świetle danych ze sprawozdawczości bankowej
      [Bank-firm relationships in Poland in the light of data from bank reporting]
      ," MPRA Paper 42544, University Library of Munich, Germany, revised 29 Oct 2012.
    9. Chih-Yung Wang & Hsiang-Lin Cheng & Ya-Huei Chang, 2012. "A Question of Loyalty: Bank-Firm Relationships in Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(S3), pages 190-201, September.
    10. Uchenna Efobi & Belmondo V. Tanankem & Simplice Asongu & Ibukun Beecroft, 2016. "Exploring Multidimensional Financial Inclusion and Manufacturing Firms Performance in a Developing Country: The Case of Nigeria," Working Papers 16/043, African Governance and Development Institute..
    11. Saumitra, Bhaduri & Sunanda, Rathi, 2012. "Bank firm nexus and its impact on firm performance: an Indian case study," MPRA Paper 38000, University Library of Munich, Germany.
    12. Mario Gomes Augusto & Antonio Pedro Soares Pinto, 2015. "Banking Relationships, Managerial Ownership and Operational Performance: A Simultaneous Equations Approach in the Context of SMEs," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 6(1), pages 22-42, January.
    13. Tumer-Alkan, G., 2008. "Essays on banking," Other publications TiSEM 8d5ec521-4702-4e75-bc79-a, Tilburg University, School of Economics and Management.
    14. Chih-Yung Wang & Hsiang-Lin Cheng & Ya-Huei Chang, 2012. "A Question of Loyalty: Bank-Firm Relationships in Taiwan," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 48(S3), pages 190-201, September.

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