Working Paper: CEPR ID: DP4224
Authors: Ralf Elsas; Jan Pieter Krahnen
Abstract: Some of the most widely expressed myths about the German financial system are concerned with the close ties and intensive interaction between banks and firms, often described as Hausbank relationships. Links between banks and firms include direct shareholdings, board representation, and proxy voting and are particularly significant for corporate governance. Allegedly, these relationships promote investment and improve the performance of firms. Furthermore, German universal banks are believed to play a special role as large and informed monitoring investors (shareholders). For the very same reasons, however, German universal banks are frequently accused of abusing their influence on firms by exploiting rents and sustaining the entrenchment of firms against efficient transfers of firm control.In this Paper, we review recent empirical evidence regarding the special role of banks for the corporate governance of German firms. We differentiate between large exchange-listed firms and small and medium sized companies throughout. With respect to the role of banks as monitoring investors, the evidence does not unanimously support a special role of banks for large firms. Only one study finds that banks? control of management goes beyond what non-bank shareholders achieve. Proxy-voting rights apparently do not provide a significant means for banks to exert management control.Most of the recent evidence regarding small firms suggests that a Hausbank relationship can indeed be beneficial. Hausbanks are more willing to sustain financing when borrower quality deteriorates, and they invest more often than arm?s-length banks in workouts if borrowers face financial distress.
Keywords: corporate finance; corporate governance; hausbank; relationship lending; universal banking
JEL Codes: G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| bank dependence (G21) | firm performance (L25) |
| direct equity stakes held by banks (G21) | firm performance (L25) |
| hausbank relationships (G21) | financing options for SMEs (E69) |
| hausbank relationships (G21) | financing during financial distress (G33) |
| relationship lending model (G21) | quality of credit provision (G21) |
| proxy voting rights (G34) | management control (M54) |
| supervisory board representation (G34) | management control (M54) |