Universal Banks and Relationships with Firms

55 Pages Posted: 26 Feb 2004

See all articles by Jan Pieter Krahnen

Jan Pieter Krahnen

Goethe University Frankfurt

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management)

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Date Written: February 2004

Abstract

Some of the most widely expressed myths about the German financial system are concerned with the close ties and intensive interaction between banks and firms, often described as Hausbank relationships. Links between banks and firms include direct shareholdings, board representation, and proxy voting and are particularly significant for corporate governance. Allegedly, these relationships promote investment and improve the performance of firms. Furthermore, German universal banks are believed to play a special role as large and informed monitoring investors (shareholders). For the very same reasons, however, German universal banks are frequently accused of abusing their influence on firms by exploiting rents and sustaining the entrenchment of firms against efficient transfers of firm control. In this Paper, we review recent empirical evidence regarding the special role of banks for the corporate governance of German firms. We differentiate between large exchange-listed firms and small and medium sized companies throughout. With respect to the role of banks as monitoring investors, the evidence does not unanimously support a special role of banks for large firms. Only one study finds that banks' control of management goes beyond what non-bank shareholders achieve. Proxy-voting rights apparently do not provide a significant means for banks to exert management control. Most of the recent evidence regarding small firms suggests that a Hausbank relationship can indeed be beneficial. Hausbanks are more willing to sustain financing when borrower quality deteriorates, and they invest more often than arm's-length banks in workouts if borrowers face financial distress.

Keywords: Relationship lending, Hausbank, universal banking, corporate finance, corporate governance

JEL Classification: G21, G32

Suggested Citation

Krahnen, Jan Pieter and Elsas, Ralf, Universal Banks and Relationships with Firms (February 2004). Available at SSRN: https://ssrn.com/abstract=509701

Jan Pieter Krahnen (Contact Author)

Goethe University Frankfurt ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

Ralf Elsas

Ludwig Maximilian University of Munich (LMU) - Faculty of Business Administration (Munich School of Management) ( email )

Kaulbachstr. 45
Munich, DE 80539
Germany

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