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

Abstract

Economic historians have credited the German universal banks with lowering the costs and raising the efficiency of corporate finance. Because of the apparent monitoring they represent, formal bank relationships are thought to ameliorate problems of asymmetric information that normally limit firms’’ access to outside finance. In a large sample of German firms circa 1904, 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. Bank attachment alters these patterns only minimally. The findings suggest that bank oversight had little to do with leverage decisions, particular short-term borrowing, in the later stages of the German industrialization.