Bank-firm relationships, financing and firm performance in Germany

Close bank-firm relationships that characterize the financial systems in Ge rmany and Japan are often credited for reducing agency costs and increasing access to capital, thus improving the performance of firms. Critics of the se banking systems cite the alternative possibility that conflicts of inter ests may also arise from both the banks' multiple roles with the firm, and the opportunity the banks have to use private information to shift risk or to otherwise participate in rent-seeking activities. We extend the empirica l literature by systematically investigating the impact of bank-influence o n the financing choices and performance of the firm. We find that bank-infl uenced firms in Germany do benefit from increased access to capital. There is, however, no evidence to support the hypothesis of either higher profita bility or growth for bank-influenced firms. Results suggest that the intere st payments to debt ratio is significantly higher for bank-influenced firms , which supports the hypothesis that German universal banks may engage in r ent-seeking activities and provides evidence of a conflicting interests bet ween creditors and shareholders. (C) 2001 Elsevier Science BN. All rights r eserved.