Credit Market Conditions and the Value of Banking Relationships for Private Firms

44 Pages Posted: 19 Mar 2009

See all articles by Cem Demiroglu

Cem Demiroglu

Koc University, College of Administrative Sciences and Economics

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate

Atay Kizilaslan

Independent

Date Written: March 18, 2009

Abstract

In this paper, we use a large sample of private firms that engage in sellout or IPO transactions to investigate the determinants and value of banking relationships for private firms. Overall, we find that while the determinants of banking relationships for private firms are similar to those for public firms, access to bank lending for private firms is significantly more sensitive to internally generated funds and credit market conditions. We also find private firms are more likely to substitute trade credit for bank loans when banks tighten lending standards, which suggests that private firms are more likely to be rationed when credit markets are tight. In addition, we find that banking relationships are associated with significantly higher private firm valuations. Moreover, the impact of banking relationships on firm value is the greatest for younger and smaller private firms, where bank generated "soft" information is likely to be the most important, and relationships are significantly more valuable in tight credit environments.

Keywords: banking relationships, trade credit, soft information, credit rationing, credit channel, IPO, private sellouts

JEL Classification: D82, E5, G21, G32

Suggested Citation

Demiroglu, Cem and James, Christopher M. and Kizilaslan, Atay, Credit Market Conditions and the Value of Banking Relationships for Private Firms (March 18, 2009). Available at SSRN: https://ssrn.com/abstract=1362565 or http://dx.doi.org/10.2139/ssrn.1362565

Cem Demiroglu (Contact Author)

Koc University, College of Administrative Sciences and Economics ( email )

Koc University
Sariyer
Istanbul, 34450
Turkey
90-212-338-1620 (Phone)
90-212-338-1653 (Fax)

HOME PAGE: http://https://sites.google.com/site/cemdemiroglu/

Christopher M. James

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611-7168
United States
352-392-3486 (Phone)
352-392-0301 (Fax)

Atay Kizilaslan

Independent ( email )

No Address Available

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