MAINBANKS AND INVESTMENT EFFICIENCY IN FINANCIAL DISTRESS

In: The journal of financial research: the journal of the Southern Finance Association and the Southwestern Finance Association, Band 23, Heft 4, S. 395-410

Abstract

AbstractWe explore the effects of mainbanks on investment efficiency in financial distress. The previous literature argues that firms with close financial relationships with banks have lower costs of financial distress because of a reduced underinvestment problem. Although benefits may accrue to such close relationships, we contend shortcomings are possible as well. A firm in financial distress without a mainbank may be forced to reduce investment or sell assets to a buyer who has a higher value. However, for a firm with a mainbank, this disciplinary force is weakened. To firms with poor investment opportunities, the presence of mainbanks may actually induce an overinvestment problem. The empirical findings reported here are consistent with this idea.JEL classification: G31, G33, G34.