Corporate Capital Structure and the Influence of Universal Banks in Pre-War Germany

Abstract

Information asymmetries and conflicts of interest are theorized to inflate the cost of external finance, but formal bank relationships are thought to ameliorate such problems and may even lead to excessive leverage. Bank oversight is associated with slightly higher leverage but not with greater use of bank debt. Older and cash-rich firms have lower leverage and less bank debt, suggesting that information problems affected firms’ financing decisions; but bank attachment appears not to alter these patterns. The findings suggest that bank oversight had little to do with leverage decisions, particularly short-term borrowing, in the later stages of the German industrialization.