Creditor concentration: An empirical investigation

Abstract

Most of the literature addressing multiple banking assumes equal financing shares. However, unequal, concentrated or asymmetric bank borrowing is widespread. This paper investigates the determinants of creditor concentration for German firms using a comprehensive bank-firm level dataset for the time period between 1993 and 2003. We document that lending is very often concentrated and, consequently, that relationship lending is important, not only for the small firms but also for the larger firms in our sample.However, we also find that risky, illiquid, large and leveraged firms spread their borrowing more evenly between multiple lenders. On the other hand, the degree of concentration increases with the profitability of the relationship lender. Relationship lending may spur financing provided by other banks, especially if the relationship lender is a public sector bank and if the other banks are large or do not have to tie up additional funds in capital.

Bank Relationships and Private Firms’ Financial Reporting Quality

“…Thus, it is not surprising that the empirical relationship lending empirical literature addresses private firms only (e.g. Elsas, 2005;Ongena et al, 2012).…”

“…Following the literature (Berger & Udell, 1998;Elsas, 2005;Ongena, Tümer-Alkan, & Westernhagen, 2012), we measure relationship lending by the number of bank relationships a firm has. The fewer bank relationships a firm has, the more intense these relationships are expected to be.…”

“…Germany is the fourth largest economy in the world, with a bank-based system of more than 2000 banks. This makes it an ideal environment to study bank relationships (Ongena et al, 2012). We focus on a homogenous set of private mediumsized corporations which are subject to the same regulations in corporate law, financial reporting law and bankruptcy law.…”

Corporate choice of banks: Decision factors, decision maker, and decision process — First evidence

“…Moreover, if banks have a higher number of branches on average, firms do not concentrate their bank relationships. 14 In sum, we document that 'Number' and 'Largest Share' are not determined by the same set of variables, a result also documented for German firms by Ongena et al (2010).…”

“…The largest part of the empirical literature focuses on the number of relationships (e.g., Detragiache et al, 2000;and Ongena and Smith, 2000). Only a few recent papers study relationship concentration (Guiso and Minetti, 2010;and Ongena et al, 2010). Other papers explore the factors that impact a firm's propensity to switch banks.…”