Inter-Firm Relationships and the Special Role of Common Banks

Abstract

Using a novel dataset that combines information on customer-supplier trade relationships with information on firm-bank lending relationships, we show that common banks that lend to firms at both ends of a trade link grow and strengthen such trade relationships. To establish causality, we use bank mergers, which generate exogenous variations in the presence of common banks, and show that common bank relationships between customers and suppliers increase trade relationships by 41.5%. We find that the role of a common bank is greater when it is more informed and when supply chains suffer from larger information and holdup problems. We also document that suppliers with common banks face lower bankruptcy spillover risks from a distressed customer, adopt a focused customer base, and invest more in relationship specific assets. Lastly, we show that common banks play a central role in facilitating provision of trade credit by suppliers during periods of systemic distress (e.g., the Great Recession). Overall, our findings show the unique role of banks in driving inter-firm growth and investment by mitigating information and holdup problems, which arguably leads to greater economic growth.

Keywords: supply chain, bank relationship, customer concentration, information asymmetry, hold-up problems, economic growth, financial intermediation, trade credit

JEL Classification: G21, G30, G32, L14