Have Banks Filled the Gap?
31 Pages Posted: 20 Oct 2008 Last revised: 5 Aug 2009
Date Written: October 20, 2008
Poland, as any other transition country, suffers from inefficient corporate governance, and thus firms may have difficulties with obtaining external financing. This paper aims to examine whether bank's involvement in corporate control measured by having a bank member on the firm's supervisory board reduces information asymmetries, and hence lessens firm's financial constraints - phenomenon frequently measured by investment-cash flow sensitivity. In the sample of all non-financial companies listed during 1999-2002 on the Polish stock exchange firms with a banker on the board rely more heavily on bank loans than on internal capital in their investment activities. In contrast, firms with no banker on the board finance to a larger extent their investment with internal capital than with credit. It shows that bank loans are more important source of financing for firms with personal bank ties than for firms without such ties. However, firms with a close relationship with bank-creditor are almost as much financially constrained as firms without bank representative on the board. Hence, the research outcome is not stable and may indicate that banks in Poland might not yet manage to decrease information asymmetries between themselves and borrowers by delegating their representatives to a debtor's supervisory board.
Keywords: corporate control and governance, firm financing, relationship banking, emerging markets
JEL Classification: G32, G34, P34
Suggested Citation: Suggested Citation