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Bank Debt and Performance of Continental European Firms

Victoria Krivogorsky

San Diego State University

Gary Grudnitski

San Diego State University

Wolfgang Dick

ESSEC Business School

May 19, 2009

When the sources of external capital for Continental European firms are examined, debt has historically supplied a much larger percentage of the external capital than equity markets. Moreover, firms in Continental Europe often rely more on bank debt than bonds for their external funds. The objective of this paper is to offer insights into bank-based governance and as an innovation to the literature, we test for the impact that banks derive when they are major assets owners through debt but do not have significant equity holdings. For our tests we use a unique data set collected from the ORBIS and AMADEUS data bases consisting of 683 firm observations from Austria, Belgium, France, Germany, the Netherlands, Portugal and Spain. After controlling for firm- and country-specific characteristics, we test to determine if the share of the assets owned by a bank through direct debt is correlated with a firm's performance. Testing only those companies where banks are minority shareholders, we minimize possible confounding effects on performance from the banks equity ownership. We find statistical support for the association between the bank ownership of the assets and performance for our overall sample. When repeating a separate analysis for each country other than Portugal, we find consistent support for the relationship between bank debt and the performance measure of return on assets for firms from each of the six remaining countries in our sample. Overall, these results lend credence to the notion that a bank, through its long-term debt, appears to serve as a significant countervailing force to the governance practices of a firm’s equity owners.

Number of Pages in PDF File: 30

Keywords: bank debt/total assets, corporate governance, financial performance

JEL Classification: G15, G32, G34

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Date posted: August 8, 2008 ; Last revised: May 20, 2009

Suggested Citation

Krivogorsky, Victoria and Grudnitski, Gary and Dick, Wolfgang, Bank Debt and Performance of Continental European Firms (May 19, 2009). Available at SSRN: https://ssrn.com/abstract=1209022 or http://dx.doi.org/10.2139/ssrn.1209022

Contact Information

Victoria Krivogorsky (Contact Author)
San Diego State University ( email )
San Diego, CA 92182-0763
United States
Gary Grudnitski
San Diego State University ( email )
San Diego, CA 92182-0763
United States
Wolfgang Dick
ESSEC Business School ( email )
3 Avenue Bernard Hirsch
CS 50105 CERGY
Feedback to SSRN

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