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Relationship Banking, Liquidity, and Investment in the German Industrialization
Author(s) -
Fohlin Caroline
Publication year - 1998
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00070
Subject(s) - market liquidity , liquidity crisis , investment (military) , liquidity risk , monetary economics , constraint (computer aided design) , accounting liquidity , business , sensitivity (control systems) , financial system , economics , mechanical engineering , electronic engineering , politics , law , political science , engineering
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.