Bank firm nexus and its impact on firm performance: an Indian case study

Saumitra Bhaduri and Rathi Sunanda

MPRA Paper from University Library of Munich, Germany

Abstract: The paper examines the role of banking relationships on firm performance for a sample of Indian manufacturing firms. The two variables used to portray banking relationships are: the extent of bank borrowing and the number of banking relationships maintained by a firm. Analysis suggests that while the extent of bank borrowing has a negative impact on firm performance, the multiple banking relationships maintained by a firm positively enhances firm performance. In addition, firm performance plays an important role in influencing bank borrowing and the number banking relationships a firm maintains. While banking relationships are positively impacted by firm performance, results suggest nonlinearity between bank financing and firm performance, suggesting the possibility of a potential debt overhang concern. This implies that firms with low growth opportunities tend to borrow more from banks due to lack of other opportunities to finance their investments. However, firms beyond a certain threshold of profitability tend to employ lesser debt to finance their investments in order to prevent the wealth transfer from shareholders to creditors.

Keywords: Bank; Firm; Realationship; India (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: 2012-04-10
New Economics Papers: this item is included in nep-cse, nep-eff and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:38000

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