Do firms select their main bank relationship according to their risk or risk preferences?
Relationship banking is attractive for high risk firms since it improves their
access to finance and provides liquidity insurance. Low risk firms instead may not
want to bear the additional costs. I employ a nested logit model to study the determinants
of the main bank relationship decision by newly established German firms. I
find that firms that ask for bank support in case of financial distress are more likely
to choose a relationship-oriented bank, such as a public or cooperative bank. Cost
sensitive firms are more likely to choose a private bank. But I find no evidence that
firms select a bank according to ex ante risk. Transaction oriented banks are not able
to attract low risk firms.
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