No Bank, One Bank, Several Banks: Does it Matter for Investment?

59 Pages Posted: 25 Mar 2010 Last revised: 12 Apr 2010

See all articles by Alexander Karaivanov

Alexander Karaivanov

Simon Fraser University (SFU) - Department of Economics

Sonia Ruano

Banco de España

Jesus Saurina Salas

Banco de España

Robert M. Townsend

MIT - Department of Economics

Date Written: March 22, 2010

Abstract

This paper examines whether financial constraints affect firms’ investment decisions for older (larger) firms. We compare a group of unbanked firms to firms that rely on formal financing. Specifically, we combine data from the Spanish Mercantile Registry and the Bank of Spain Credit Registry (CIR) to classify firms according to their number of banking relations: one, several, or none. Our empirical strategy combines two approaches based on a common theoretical model. First, using a standard Euler equation adjustment cost approach to investment, we find that single-banked firms in our sample are most likely to exhibit cash flow sensitivity while unbanked firms are not. Second, using structural maximum likelihood estimation, we find that unbanked firms have a financial structure which is close to credit subject to moral hazard with unobserved effort, whereas single-banked firms have a financial structure which is more limited, as in an exogenously imposed traditional debt model. Firms in the unbanked category do not rely on bonds, equity, or formal financial markets, but rather on other firms in a financial or family-tied group (with either pyramidal or informal structure). We are among the first to document the importance of such groups in a European country. We control for reverse causality by treating bank relationships as endogenous and/or by appropriate stratifications of the sample.

Keywords: financial constraints, bank lending, investment Euler equations, moral hazard, structural estimation and testing

JEL Classification: C61, D82, D92, G21, G30

Suggested Citation

Karaivanov, Alexander and Ruano, Sonia and Saurina Salas, Jesus and Townsend, Robert M., No Bank, One Bank, Several Banks: Does it Matter for Investment? (March 22, 2010). Banco de Espana Working Paper No. 1003. Available at SSRN: https://ssrn.com/abstract=1578246 or http://dx.doi.org/10.2139/ssrn.1578246

Alexander Karaivanov

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

Sonia Ruano (Contact Author)

Banco de España ( email )

Madrid 28014
Spain

Jesus Saurina Salas

Banco de España ( email )

Madrid 28014
Spain

Robert M. Townsend

MIT - Department of Economics ( email )

Bldg. E52-252c
50 Memorial Drive
Cambridge, MA 02142
United States
617-452-3722 (Phone)
617-253-1330 (Fax)

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