Hostname: page-component-cd4964975-598jt Total loading time: 0 Render date: 2023-03-28T20:34:14.506Z Has data issue: true Feature Flags: { "useRatesEcommerce": false } hasContentIssue true

Labor and Finance: The Effect of Bank Relationships

Published online by Cambridge University Press:  02 November 2022

Patrick Behr
Università della Svizzera Italiana
Lars Norden*
Brazilian School of Public and Business Administration, EPGE Brazilian School of Economics and Finance, and Getulio Vargas Foundation
Raquel de Freitas Oliveira
Central Bank of Brazil
* (corresponding author)
Rights & Permissions[Opens in a new window]


HTML view is not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

We investigate whether firms’ number of credit relationships with financial institutions affects labor market outcomes. Using 5 million observations on matched credit and labor panel data from Brazil, we estimate IV regressions, employing exogenous variation in firm-lender relationships due to nationwide bank M&A activity. Firms with more relationships employ more workers and pay higher wage bills. Credit availability, cost of credit, and financial institution heterogeneity are economic channels. The firm-level results translate into positive macroeconomic effects in municipalities and states. The evidence is novel and indicates the positive effects of multiple relationships on labor market outcomes in an emerging economy.

Research Article
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington


An earlier version of this article circulated as Banco Central do Brasil, Working Paper No. 534, Sept. 2020. Norden acknowledges financial support from Conselho Nacional de Desenvolvimento Científico e Tecnológico (CNPq) under grant no. 422229/2016-4. We thank an anonymous referee and Mara Faccio (the editor) for helpful comments and suggestions. We also thank Diana Bonfim, Murillo Campello, Jens Christensen, Rebel Cole, Bernardus van Doornik, Christoper Foote, Martin Hibbeln, Michal Kowalik, Simon Kwan, Sergio Lage, participants at the ASSA-IBEFA 2021 Meetings and the Southern Finance Association 2020 Conference, as well as seminar participants at the Central Bank of Brazil, Federal Reserve Bank of Boston, Federal Reserve Bank of San Francisco, and the University of Duisburg-Essen.


Alfaro, L.; García-Santana, M.; and Moral-Benito, E.. “On the Direct and Indirect Real Effects of Credit Supply Shocks.” Journal of Financial Economics, 139 (2021), 895921.CrossRefGoogle Scholar
Ayyagari, M.; Juarros, P.; Peria, M. Martinez; and Singh, S.. “Access to Finance and Job Growth: Firm-Level Evidence across Developing Countries.” Review of Finance, 25 (2021), 14731496.CrossRefGoogle Scholar
Azariadis, C.Implicit Contracts and Underemployment Equilibria.” Journal of Political Economy, 83 (1975), 11831202.CrossRefGoogle Scholar
Bai, J.; Carvalho, D.; and Phillips, G.. “The Impact of Bank Credit on Labor Reallocation and Aggregate Industry Productivity.” Journal of Finance, 73 (2018), 11391182.CrossRefGoogle Scholar
Bailey, M.Wages and Employment Under Uncertain Demand.” Review of Economic Studies, 41 (1974), 2750.Google Scholar
Banco Central do Brasil. “Evolution of the Credit Market in Monetary Policy Easing Cycles.” Inflation Report, March (2018), 4147.Google Scholar
Beck, T.; Degryse, H.; De Haas, R.; and Van Horen, N.. “When Arm’s Length Is Too Far: Relationship Banking over the Business Cycle.” Journal of Financial Economics, 127 (2018), 174196.CrossRefGoogle Scholar
Beck, T.; Demirgüç-Kunt, A.; Laeven, L.; and Levine, R.. “Finance, Firm Size, and Growth.” Journal of Money, Credit and Banking, 40 (2008), 13791405.CrossRefGoogle Scholar
Beck, T.; Demirgüç-Kunt, A.; and Peria, M. Martinez. “Reaching Out: Access to and Use of Banking Services Across Countries.” Journal of Financial Economics, 85 (2007), 234266.CrossRefGoogle Scholar
Beck, T.; Levine, R.; and Loayza, N.. “Finance and the Sources of Growth.” Journal of Financial Economics, 58 (2000), 261300.CrossRefGoogle Scholar
Benmelech, E.; Bergman, N.; and Seru, A.. “Financing Labor.” Review of Finance, 25 (2021), 13651393.CrossRefGoogle Scholar
Benmelech, E.; Frydman, C.; and Papanikolaou, D.. “Financial Frictions and Employment During the Great Depression.” Journal of Financial Economics, 133 (2019), 541563.CrossRefGoogle Scholar
Berger, A.; Miller, N.; Petersen, M.; Rajan, R.; and Stein, J.. “Does Function Follow Organizational Form? Evidence from The Lending Practices of Large and Small Banks.” Journal of Financial Economics, 76 (2005), 237269.CrossRefGoogle Scholar
Berger, A., and Roman, R.. “Did Saving Wall Street Really Save Main Street? The Real Effects of TARP on Local Economic Conditions.” Journal of Financial and Quantitative Analysis, 52 (2017), 18271867.CrossRefGoogle Scholar
Berger, A., and Udell, G.. “Relationship Lending and Lines of Credit in Small Firm Finance.” Journal of Business, 68 (1995), 351382.CrossRefGoogle Scholar
Berton, F.; Mocetti, S.; Presbitero, A.; and Richiardi, M.. “Banks, Firms, and Jobs.” Review of Financial Studies, 31 (2018), 21132156.CrossRefGoogle Scholar
Bonfim, D.; Dai, Q.; and Franco, F.. “The Number of Bank Relationships and Borrowing Costs: The Role of Information Asymmetries.” Journal of Empirical Finance, 46 (2018), 191209.CrossRefGoogle Scholar
Bonfim, D.; Nogueira, G.; and Ongena, S.. “Sorry, We’re Closed” Loan Conditions When Bank Branches Close and Firms Transfer to Another Bank.” Review of Finance, 25 (2021), 12111259.CrossRefGoogle Scholar
Campello, M.; Graham, J.; and Harvey, C.. “The Real Effects of Financial Constraints: Evidence from a Financial Crisis.” Journal of Financial Economics, 97 (2010), 470487.CrossRefGoogle Scholar
Carletti, E.; Cerasi, V.; and Daltung, S.. Multiple-Bank Lending: Diversification and Free-Riding in Monitoring. Journal of Financial Intermediation, 16 (2007), 425451.CrossRefGoogle Scholar
Carvalho, D.The Real Effects of Government-Owned Banks: Evidence from an Emerging Market.” Journal of Finance, 69 (2014), 577609.CrossRefGoogle Scholar
Cerqueiro, G., and Penas, M.. “How Does Personal Bankruptcy Law Affect Startups?Review of Financial Studies, 30 (2017), 25232554.CrossRefGoogle Scholar
Chodorow-Reich, G.The Employment Effects of Credit Market Disruptions: Firm-Level Evidence from the 2008–09 Financial Crisis.” Quarterly Journal of Economics, 129 (2014), 159.CrossRefGoogle Scholar
Cole, R.The Importance of Relationships to the Availability of Credit.” Journal of Banking and Finance, 22 (1998), 959977.CrossRefGoogle Scholar
Cole, R.; Goldberg, L.; and White, L.. “Cookie Cutter vs. Character: The Micro Structure of Small Business Lending by Large and Small Banks.” Journal of Financial and Quantitative Analysis, 39 (2004), 227251.CrossRefGoogle Scholar
Cortes, G., and Marcondes, R.. “The Evolution of Brazil’s Banking System.” In The Oxford Handbook of the Brazilian Economy (2018), 198220.CrossRefGoogle Scholar
Degryse, H.; Ioannidou, V.; and von Schedvin, E.. “On the Non-Exclusivity of Loan Contracts: An Empirical Investigation.” Management Science, 62 (2016), 35103533.CrossRefGoogle Scholar
Degryse, H.; Masschelein, N.; and Mitchell, N.. “Staying, Dropping, or Switching: The Impacts of Bank Mergers on Small Firms.” Review of Financial Studies, 24 (2011), 11021140.CrossRefGoogle Scholar
Detragiache, E.; Garella, P.; and Guiso, L.. “Multiple vs. Single Banking Relationships: Theory and Evidence.” Journal of Finance, 55 (2000), 11331161.CrossRefGoogle Scholar
Duygan-Bump, B.; Levkov, A.; and Montoriol-Garriga, J.. “Financing Constraints and Unemployment: Evidence from the Great Recession.” Journal of Monetary Economics, 75 (2015), 89105.CrossRefGoogle Scholar
Farinha, L, and Santos, J.. “Switching from Single to Multiple Bank Lending Relationships: Determinants and Implications.” Journal of Financial Intermediation, 11 (2002), 124151.CrossRefGoogle Scholar
Fonseca, J., and van Doornik, B.. “Financial Development and Labor Market Outcomes: Evidence from Brazil.” Journal of Financial Economics, 143 (2022), 550568.CrossRefGoogle Scholar
Garmaise, M.Production in Entrepreneurial Firms: The Effects of Financial Constraints on Labor and Capital.” Review of Financial Studies, 21 (2008), 543577.CrossRefGoogle Scholar
Giroud, X., and Mueller, H.. “Firm Leverage, Consumer Demand, and Employment Losses During the Great Recession.” Quarterly Journal of Economics, 132 (2017), 271316.CrossRefGoogle Scholar
Gopalan, R.; Udell, G.; and Yerramilli, V.. “Why Do Firms Form New Banking Relationships?Journal of Financial and Quantitative Analysis, 46 (2011), 13351365.CrossRefGoogle Scholar
Hombert, J., and Matray, A.. “The Real Effects of Lending Relationships on Innovative Firms and Inventor Mobility.” Review of Financial Studies, 30 (2016), 24132445.CrossRefGoogle Scholar
Ioannidou, V., and Ongena, S.. “Time for a Change”: Loan Conditions and Bank Behavior when Firms Switch Banks.” Journal of Finance, 65 (2010), 18471877.CrossRefGoogle Scholar
Jayaratne, J., and Strahan, P.. “The Finance-Growth Nexus: Evidence from Bank Branch Deregulation.” Quarterly Journal of Economics, 111 (1996), 639670.CrossRefGoogle Scholar
Jiang, W.Have Instrumental Variables Brought Us Closer to the Truth.” Review of Corporate Finance Studies, 6 (2017), 127140.CrossRefGoogle Scholar
King, R., and Levine, R.. “Finance and Growth: Schumpeter Might Be Right.” Quarterly Journal of Economics, 108 (1993), 717737.CrossRefGoogle Scholar
Kleibergen, F., and Paap, R.. “Generalized Reduced Rank Tests Using the Singular Value Decomposition.” Journal of Econometrics, 127 (2006), 97126.CrossRefGoogle Scholar
Kysucky, V., and Norden, L.. “The Benefits of Relationship Lending in a Cross-Country Context: A Meta-Analysis.” Management Science, 62 (2016), 90110.CrossRefGoogle Scholar
Ongena, S., and Smith, D.. “What Determines the Number of Bank Relationships? Cross-Country Evidence.” Journal of Financial Intermediation, 9 (1999), 2656.CrossRefGoogle Scholar
Ornelas, J.; Silva, M.; and van Doornik, B.. “Informational Switching Costs, Bank Competition and the Cost of Finance.” Banco Central do Brasil Working Paper No. 512 (2020).Google Scholar
Pagano, M. “Risk Sharing Within the Firm: A Primer.” Foundations and Trends in Finance, 12 (2020), 117198.Google Scholar
Pagano, M., and Pica, G.. “Finance and Employment.” Economic Policy, 27 (2012), 555.CrossRefGoogle Scholar
Petersen, M., and Rajan, R.. “The Benefits of Lending Relationships: Evidence from Small Business Data.” Journal of Finance, 49 (1994), 337.CrossRefGoogle Scholar
Ponticelli, J., and Alencar, L.. “Court Enforcement, Bank Loans, and Firm Investment: Evidence from a Bankruptcy Reform in Brazil.” Quarterly Journal of Economics, 131 (2016), 13651413.CrossRefGoogle Scholar
Popov, A., and Rocholl, J.. “Do Credit Shocks Affect Labor Demand? Evidence for Employment and Wages During the Financial Crisis.” Journal of Financial Intermediation, 36 (2018), 1627.CrossRefGoogle Scholar
Rajan, R., and Zingales, L.. “Financial Dependence and Growth.” American Economic Review, 88 (1998), 559586.Google Scholar
Silva, T.; Tabak, B.; and Laiz, M.. “The Finance-Growth Nexus: The Role of Banks.” Banco Central do Brasil Working Paper No. 506 (2019).Google Scholar
Van Doornik, B.; Gomes, A.; Schoenherr, D.; and Skrastins, J.. “Financial Access and Labor Market Outcomes: Evidence from Credit Lotteries.” Working Paper, available at (2021).CrossRefGoogle Scholar
Whited, T.JFE Special Issue on Labor and Finance.” Journal of Financial Economics, 133 (2019), 539540.CrossRefGoogle Scholar