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Investment in Relationship-Specific Assets: Does Finance Matter?

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Existing literature highlights opportunistic behavior as the main reason why rational agents underinvest in relationship-specific assets (the hold-up problem). However, a supplier would also be reluctant to undertake relationship-specific investment if she cannot observe financial stability or planning horizon of a buyer. By combining insights from research on relationship-specific investment and signaling role of financial intermediaries, we argue that a strong banking sector can alleviate these information asymmetries between buyers and suppliers. We empirically confirm this hypothesis by showing that industries dependent on relationship-specific investment from their suppliers grow disproportionately faster in countries with a strong banking sector.

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Paper provided by Knut Wicksell Centre for Financial Studies, Lund University in its series Knut Wicksell Working Paper Series with number 2013/10.

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Length: 36 pages
Date of creation: 19 Jun 2013
Handle: RePEc:hhs:luwick:2013_010
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Knut Wicksell Centre for Financial Studies, Lund University School of Economics and Management, P.O. Box 7080, S-220 07 Lund, Sweden

Phone: +46 46-222 32 61
Fax: +46 46-222 34 06
Web page: http://www.lusem.lu.se/kwc

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