Credit Market Conditions and the Value of Banking Relationships for Private Firms
44 Pages Posted: 19 Mar 2009
Date Written: March 18, 2009
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
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