Bank Relationships, Ownership Concentration, and Investment Patterns of Spanish Corporate Firms

45 Pages Posted: 19 Oct 2006

See all articles by Caroline Fohlin

Caroline Fohlin

Emory University; Centre for Economic Policy Research (CEPR)

Félix J. López-Iturriaga

Universidad de Valladolid - Department of Finance and Accounting; National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy

Date Written: October 2006

Abstract

A firm's investment-cash flow sensitivity is often considered evidence of financial constraints, but such sensitivity may also stem from agency problems of free cash flows (managers overinvest). Close banking relationships are thought to ameliorate financing constraints and possibly agency problems, while ownership concentration mostly serves to prevent the latter. In Spain, a civil-law (French) system, where banks play a prominent role and where capital markets remain underdeveloped, these effects could be magnified. We find that bank relationships (via equity ownership or via debt) have little effect on firms' investment-cash flow sensitivity. In contrast, we find significantly lower cash-flow sensitivity among firms with high ownership concentration. The findings bolster the managerial overinvestment interpretation of cash-flow sensitivity and suggest that bank relationships provide imperfect substitutes for the oversight of large stakeholders.

Keywords: investment, cash-flow sensitivity, financing constraints, managerial overinvestment, bank relationships, ownership concentration, civil law tradition

JEL Classification: G3, G2, K2

Suggested Citation

Fohlin, Caroline and Lopez-Iturriaga, Felix Javier, Bank Relationships, Ownership Concentration, and Investment Patterns of Spanish Corporate Firms (October 2006). Available at SSRN: https://ssrn.com/abstract=938525 or http://dx.doi.org/10.2139/ssrn.938525

Caroline Fohlin

Emory University ( email )

Dept. of Economics
Atlanta, GA Georgia 30322
United States
4047276363 (Phone)

HOME PAGE: http://https://scholar.google.com/citations?user=Ma08bxEAAAAJ&hl=en

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Felix Javier Lopez-Iturriaga (Contact Author)

Universidad de Valladolid - Department of Finance and Accounting ( email )

Avda. Valle Esgueva 6
47011 Valladolid
Spain
+34 983 184 395 (Phone)
+34 983 183830 (Fax)

National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy ( email )

Lebedeva,27
Perm, Perm 614070
Russia

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