Bank Relationships, Ownership Concentration, and Investment Patterns of Spanish Corporate Firms
45 Pages Posted: 19 Oct 2006
Date Written: October 2006
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: Suggested Citation