Relationship Banking, Liquidity, and Investment in the German Industrialization
Because of apparently close ties between banks and industry, German-style universal banking is thought by many to improve investment efficiency. This paper presents new evidence to the contrary. Using a panel of firm data from Germany's heavy industrialization period (1903-1913), the analysis shows that investment is more sensitive to internal liquidity for bank-networked firms than unattached firms, and that this effect is only minimally offset in the long run. Furthermore, the paper presents extensive evidence on the characteristics of bank-attached firms and demonstrates through direct tests that the estimated investment equations are free of selection bias.
Revised version. Original dated to October 1993. This paper is a substantially revised version of Chapters 3 and 7 of my dissertation, Fohlin (1994). I am grateful to Stefano Athanasoulis, Peter Bossaerts, Lance Davis, Jeff Dubin, Barry Eichengreen, Tim Guinnane, David Grether, Bronwyn Hall, Takeo Hoshi, Naomi Lamoreaux, John Latting, Richard Meese, David Romer, Ken Sokoloff, Richard Tilly, Kenneth Train, and Eugene White as well as to workshop participants at Berkeley, UCLA, UCSD, Caltech, Stanford, the NBER, the Universities of Mannheim, Miinster and Munich and conference participants at the All-U.C. Group in Economic History (Fall 1994), the Cliometric Society (1995), the Social Science History Association (1995), and the Econometric Society Summer Meetings (1996) for helpful discussions and comments on earlier drafts. Financial support from the Joint Committee on Western Europe of the American Council of Learned Societies and the Social Science Research Council (with funds provided by the Ford and Mellon Foundations), the Center for German and European Studies at U.C. Berkeley, and the Mellon Foundation Area Studies Fellowship Program is gratefully acknowledged. Published as Fohlin, Caroline. "Relationship banking, liquidity, and investment in the German industrialization." The Journal of Finance 53, no. 5 (1998): 1737-1758.
Submitted - sswp913_-_revised.pdf